Shockingly poor economic figures out of China today suggest the country's economy could even have shifted into reverse. The lockdown in Shanghai, parts of Beijing and many other cities is really starting to bite, and consumers have essentially stopped making anything other than absolutely essential purchases.
China's economy as a whole may even get smaller over the course of Q2, according to analysis from Nomura. The investment bank already has a Q2 call that is well below consensus, of 1.8% GDP growth vs. the 4.0% market consensus. But it sees "increased downside risks" to its forecast, with the potential for a contraction, or what economists euphemistically call "negative growth."
ING experts have already made the call that the Chinese economy will contract in Q2, envisioning a 1% decline compared with Q2 2021. The "R" word, recession, wouldn't then be far from people's lips.
While Covid case counts appear to have peaked, "the unwinding of lockdowns has been extremely slow, due partly to the caution among local government officials," China chief economist Ting Lu and his team state in a Nomura note to clients. "Therefore, we believe local lockdowns will still severely impact the production-end of the economy in May, and view a quick turnaround as all but impossible."
Retail sales in China shrank 11.1% year-on-year in April, according to Monday's data, a far deeper cut than the 6.6% wound that economists predicted. Restaurants were particularly severely affected, with people either unwilling or not allowed to eat out, causing the catering category to crater 22.7%.
The monthly numbers on industrial production also showed a decline, of 2.9%. That's significant because the Chinese government has attempted to jumpstart the post-Covid economy through factory production. Services fell 6.1%.
It is in big-ticket items that the effects of China's "zero-Covid strategy" are most obvious. Car purchases plummeted 35.5% in April, the worst figures for that month in a decade, according to figures from the China Passenger Car Association. Private-car production shrank 41.1%, with Shanghai and Jilin Province both home to large clusters of car and car-parts makers.
Due to problems getting parts, Tesla (TSLA) , for instance, has halted the vast majority of its output at its Shanghai factory, according to an internal memo seen by Reuters. Its sales in China also basically stopped, down 98% compared with March, since many would-be shoppers are unable to visit showrooms or test out cars.
Likewise, new-home sales volumes are down dramatically, with a 39.0% decline for April compared to the same time last year, when the industry was already slowing. That was double the pact of decline for March. Developers are responding to poor sales and requirements that they deleverage by cutting back activity, with land-sales volume contracting 57.3% compared with April 2021. New-home starts fell 44.2%.
"The deep contraction in land markets will likely weigh on local-government land sales revenues and infrastructure investment," Lu and his team point out at Nomura. Selling land is a key source of funding for cities and provinces, so the decline could threaten broader development plans at the local level.
China is attempting limited stimulus to spur the economy along. The central bank cut the minimum mortgage rate for first-time homebuyers to 20 basis points below the loan-prime rate in China, which is currently 4.6%. But the cut does not apply to people who already own a home, so the effect is likely to be very limited. It's likely that Beijing will roll out further measures aimed at stabilizing property sales and prices, though it is cautious that any steps toward stimulus have in the past led to surges in exactly the kind of house-buying speculation that it wants to avoid.
The Chinese stats bureau tried to put a positive spin on Monday's negative numbers, highlighting that production in high-tech manufacturing is still growing fast. New-energy vehicle production still doubled, up 112.7% for April, while solar-cell manufacturing rose 27.5% and mobile-communication base station output rose 25.9%. What's more, the end result of China's epidemic prevention and economic-development measures should ultimately bear fruit, meaning "the national economy is expected to stabilize and recover."
As ever when it comes to investing, the question is "When?" We've seen in the West that production and purchasing can rebound fast if stimulus measures step up to support activity. But for the foreseeable future, China's government is more concerned about stopping the spread of Covid-19 than spurring the economy back to life.
The CSI 300 index of the largest stocks listed in Shanghai and Shenzhen fell 0.8% by the close on Monday, a modest fall by 2022 standards. Chinese stocks have now lost 19.6% so far this year, and 23.7% over the course of the last 12 months. The soaring peaks set in February 2021, when it appeared China had brought Covid well under control and life had gone back to normal, are long forgotten.
The number of new Covid-19 cases in Shanghai has fallen below 1,000, with 939 new infections reported on Monday for the previous 24 hours. Beijing continues to post new infections in the 50-60 range per day.
But China's two-largest cities account for 7.3% of China's economy on their own. There are partial or full lockdowns in 43 cities in all, according to Nomura's tracking as of May 3, accounting for 31.0% of the economy.
Monday's numbers showed that the jobless rate in 31 major cities has risen to 6.7% for April, the worst reading since stats started being collected that way in 2018, and higher than the nationwide rate of 6.1%. The government says it wants to keep the jobless rate under 5.5% this year, and also forecasts growth of "around 5.5%," but that target announced in March looks elusive.
I discussed last week how China could be swamped by a "tsunami" of Covid infection between now and July, with Fudan University researchers modeling that 1.55 million citizens could lose their lives if Covid gets out of control. A nationwide outbreak would likely overwhelm the health-care system leading to demand for intensive-care units that would run 15.6 times the actual capacity.
Chinese President Xi Jinping, who has made "beating" Covid a central part of his platform to seek reelection this fall, doubled down on the "zero-Covid strategy" at a meeting of the Politburo, its top officials, earlier this month. Notably, the readout from the country's highest decision making body omitted previous language about "reconciling ZCS with growth," and containing Covid while "minimizing the impact of the pandemic on the economy."
"We have won the battle to defend Wuhan, and we will certainly be able to win the battle to defend Shanghai," Xi told the seven-member leadership council. He has also lectured officials for "inadequate understanding, inadequate preparation and inadequate work" in implementing the zero-Covid strategy.
Xi has stepped back from the public eye when Covid outbreaks get bad. For outbreaks such as Shanghai, local officials typically take the blame, although the Chinese Communist Party's chief in the city, Li Qiang, has so far been spared. Li is a top ally of Xi, and likely to be chosen for the Politburo at the once-in-five-years leadership change this fall that should also see Xi elected to an unprecedented third term.
Although I have no doubt that harsh lockdowns can temporarily help leaders at a city level control outbreaks, the question is what China does in the long term in terms of opening up to international travel and trade. It's alone in persisting with a zero-Covid strategy, with the leadership of most nations, including Taiwan and Hong Kong, now opting for some form of living with Covid while opening up activity and borders. Even hermit nations like North Korea next door aren't spared the highly infectious Omicron variant, and as yet China has not "solved" how to combat it while keeping the economy functioning at normal levels.