China posted dismal economic numbers on Monday, sending stocks that had opened higher into the red. The poor figures for retail sales, factory output and fixed-asset investment suggest that any recovery will be excruciatingly slow from city- and district-level Covid-19 lockdowns that stymied the economy.
The July industrial production figures saw growth soften to 3.8% from 3.9% in June, when economists polled by Reuters had expected a 4.6% rise.
Retail sales, which only stopped declining in June, posted far weaker-than-expected growth of 2.7% for July, year on year, down from the 3.1% figure for the previous month. Economists had been expecting the recovery to intensify with 5.0% growth, not stall.
All the figures come from the National Bureau of Statistics. Exports are the only part of the Chinese economy that is ticking along nicely, although they are also likely to weaken due to the travails elsewhere around the world, with western Europe and the United States likely heading for recession.
Property investment continues to fall, and fast, the largest private sector in China, accounting for around one-third of the total economy. Real-estate investment shrank 12.3% for July, worse than the 9.4% fall for June.
"July economic data were simply bad," the Société Générale economists Wei Yao and Michelle Lam wrote in a note. "Deceleration resumed across the board, from production to investment and consumption, under the crushing weight of the zero-Covid policy and housing woes."
In response, the central People's Bank of China unexpectedly cut interest rates on Monday. But it was a token move, just 10 basis points for both the short-term 7-day reverse rate as well as the medium-term lending facility.
"The cut shows that policymakers still care about growth, just not much," the SocGen pair say. "The reluctance to ease looks increasingly like a new policy norm - a thesis hardly challenged by the meager 10 basis point rate cut from the PBoC one hour before the data release."
Property sales are a good layman's guide to consumer confidence in China. And that has been undone by Beijing's efforts to forcibly deleverage the sector, which has left many developers on rocky financial ground. That in turn is putting off buyers, who do not want to put down deposits on apartments that might struggle to get built.
This downward spiral in bricks and mortar risks taking other sectors with it. "Beijing's policy support could be too little, too late and too inefficient," Ting Lu and his China economics team at Nomura state. "Slightly cutting policy rates will provide little help due to low confidence."
Chinese shares dipped on Monday, although the worsening economic data is a deepening of an existing trend rather than a new factor in the markets. The challenge for stocks is that any bright horizons are quickly dimmed due to China's zero-Covid policy, which requires frequent lockdowns on movement that hamper mobility, shipments and confidence. No one wants to rush out to buy goods when they fear they could be locked into their homes and cut off from jobs and income.
Nomura believes China will sustain the zero-Covid policy through not only the once-in-five-years leadership change this fall but also until the March 2023 annual meeting where China's economic plans and forecasts for the year ahead are announced.
It is highly unlikely that China will post anything close to the growth target it set this March of "around 5.5%." In fact, economists are likely to start cutting their growth projections yet again in the next few weeks.
"Our GDP forecast of 2.7% is right now at the bottom of Street estimates, and yet may still prove too optimistic," the SocGen team state.
The CSI 300 index of the largest mainland listings in Shanghai and Shenzhen nudged 0.1% into the red. That means it is still down 14.9% so far this year, with a rally between April and early July now largely undone. The mainland market has lost 6.9% since July 4, when it seemed a stronger rebound from spring lockdowns could still take place.
Those hopes are fraying if not snapped. In Hong Kong, the Hang Seng index fell 0.7% on Monday, and is down 13.9% in 2022, and 23.5% in the last 12 months. Any bear-market rallies have swiftly been reversed.
Although long-term investors would still be looking at gains in mainland stocks, with a 5-year return of 12.4%, Hong Kong's desperately poor performance means buy-and-hold investors there are nursing a 25.9% decline in the last half-decade.
The Chinese yuan also lost ground against most currencies. It has lost 7.3% against the U.S. dollar since the start of March.
As I've been experiencing traveling around Europe this summer, China is completely out of step with the developed world in its insistence on eradicating Covid-19. The highly infectious but milder Omicron variant makes it very hard to track and isolate cases. Where vaccination rates are high, it is also hardly necessary, since hospitalizations for fully jabbed people are rare.
China has yet to develop much natural immunity, however, and the top brass likely frets that Chinese vaccines do not work very well. At best, overseas testing showed them around 50% effective against the earliest Covid strains.
But Beijing refuses to import foreign-made vaccines, purely for political pride. Any relaxation of zero-Covid could also call into question the policies of Chinese President Xi Jinping, who insists China's Covid response has been superior to the Western world. Only after his election to a third term this fall would China consider "adapting" the zero-Covid policy in favor of the "live with Covid" course now charted in developed nations.