The risk of recession is rising in China. Official numbers likely understate how badly China's economy is faring, while the rest of the world likely underestimates how hard it would be hit.
The Chinese economy grew 4.8% in the first quarter, fresh figures released Monday show. But that was on the back of particularly strong numbers for January-February, while "March activity nosedived across the board," Nomura notes. What's more, "we believe actual GDP growth could be a lot weaker than the 4.8% official data suggest."
April will be far worse, perhaps the cruelest month, though the full extent of the pandemic outside Shanghai is yet to be determined. Beijing's fight for "zero Covid" is already coming at an extreme and mounting cost, with lockdowns already affecting 40.3% of output.
Although the lockdown of Shanghai's 26 million residents is getting plenty of attention, "we still believe global markets underestimate China's growth slowdown and supply chain stress, which we feel are set to ripple to the rest of the world," Nomura China chief economist Ting Lu and his team state in a note to clients.
There's plenty of doubt about the strong numbers earlier this year, in any case. The official output figures seem "inconsistent" with nonofficial tallies, as Nomura puts it, or the data "might or might not capture the true degree of losses in growth momentum up to end-March," as Societe Generale economists Wei Yao and Michelle Lam so politely say.
"China growth figures are notoriously susceptible to manipulation," T.S. Lombard head of China and Asia research Rory Green notes in his client note Fact-Checking China in 6 Charts. "After having become more reliable in the past couple of years, 2022 could mark a return to the bad old days."
Translation: the Beijing government will likely pretend it hits its official target of 5.5% growth for this year. It has overshot its target every year in the last decade, bar 2014, when GDP growth was an inch under the schedule of "around 7.5%" -- at 7.4%. To achieve 5.5% growth is looking extremely unlikely this year, increasing the likelihood of "padding" by provincial and local officials whose salaries are often based on growth.
There's other evidence of how the world's second-biggest economy is faring in the form of the "Li Keqiang index." It's a combination of bank-loan figures with rail freight and electricity consumption, which provides a better handle on at least the factory/physical side of economic output (although it's less accurate at pegging service-sector activity). It's said that Li Keqiang, the Chinese premier, looks at those numbers if he wants to know what's going on.
Lombard says the Li Keqiang index shows a significant slowdown on the manufacturing side. In the service sector, box-office ticket sales, holiday tourism numbers and passenger air travel all showed a sharp slowdown in March, and pre-Omicron variant weakness in February. Official retail sales grew 6.7% year on year in January-February, combined to smooth the effect of the Lunar New Year, but slumped to a 3.5% decline in March, with much worse likely to come.
Lombard predicts China's economy will grow 4.0% or less this year, but that authorities will still claim a figure of 5.0%. The independent research house also notes signs of panic in Beijing, with Vice-Premier Liu He's mid-March speech to promise stimulus and to roll back several signature initiatives if the quest for "common prosperity" a case in point.
The Chinese economy "most likely" shrank in April (or in economist speak, experienced "negative growth"), Lu at Nomura believes. "Amid expansive lockdowns, logistics disruptions, the downward spiral in the property sector and slowing exports, we expect activity data to tumble in April, and gauge that the risk of recession has been rising in Q2," he and his team state.
The official figures may be important for investors, even if they're wrong, in that they will indicate the degree of official policy response. China on Friday cut reserve-ratio requirements for banks by 0.25%, effectively raising the amount that they can lend, but stimulus is not yet intense -- many in the market had been anticipating a 0.5% cut.
Another reserve-rate cut and a cut in interest rates themselves is likely by mid-year. The government is also trying to support growth through tax cuts for hard-hit sectors. But the Beijing government has yet to deliver on the kind of directly market-supportive measures that Liu said would be coming when he spoke last month.
Local government officials are also being judged by Beijing on how successful they are in suppressing Covid-19. This incentivizes them to conduct repeat rounds of mass testing, during which all movement is prevented, as well as to set up barrier upon barrier when truckers or travelers try to enter a city.
"The whole political regime may be economically efficient when the local competition is about achieving GDP growth, but it may be equally harmful to the national economy when local governments are trying to minimize coronavirus caseloads by isolating themselves," Nomura notes. The cost could be especially high when faced with a wave of Omicron, given how surprisingly infectious it is, meaning previous measures may be costlier and less effective to implement.
"The latest outbreak has affected almost every part of China of significant economic importance," Nomura explains, with 373 million people in 45 Chinese cities in some form of lockdown, affecting US$7.2 trillion or 40.3% of GDP.
Another area where China's numbers come into question is in its reporting of the extent of its Covid epidemic. On Monday, officials recorded three deaths due to Covid, all in Shanghai, all of people over 80 with underlying conditions. But these are the first deaths recorded in a month, and only nine have been reported in the last two years -- scarcely believable simply by the law of averages when you consider there's been 616,358 Covid cases in the last month, at least according to Johns Hopkins.
The Johns Hopkins figures also give a far higher death tally, of 3,740 in the last month, and 13,777 over the course of the pandemic, out of a total 1.8 million Covid cases in China. The death count would still be low by the standards of many Western nations. But it is hardly believable that official figures from the Chinese Center for Disease Control and Prevention show essentially no deaths for 2021, and only five in the current outbreak in Shanghai.
China has scolded Hong Kong officials for reporting regular death counts, which it advised could cause concern among the public. Then again, it might be accurate ... we can see from the reaction in the form of lockdowns and scaled-up rhetoric from Beijing that the outbreak is already severe, and threatens to overload the health system.
Equities factor in some of the concern. The CSI 300 of the largest listings in China fell 0.5% today, and is down 15.3% so far this year. But China's outsized impact on global growth and its potential recession are yet to be reflected in overseas stocks. Markets seem more concerned with the price of oil and the war in Ukraine.
With Chinese ports clogged, tankers backed up along the coast, workers stranded and increasingly told to move into their factories, sleeping there to live and work inside a Covid "bubble," far worse is likely to come from the Chinese economy in the next quarter. It will take some delving into non-official data and Covid numbers to work out how bad it really gets, and time to see how far-reaching the consequences of China's shutdown will reach.