A year ago today, China reported what, as far as I know, was the first simultaneous contraction in retail sales, industrial output and fixed asset investment in history.
The world’s second-largest economy was the first to institute draconian lockdowns to contain the spread of COVID-19. The measures succeeded in stopping the spread, but it’s unlikely that anyone outside of top Party officials will ever know how many Chinese actually died from the virus or complications. It’s safe to say the real numbers are far higher than the “official” tally.
When Beijing reported activity data for the period covering the country’s lockdowns, some were taken aback. Although common sense dictated that factories can’t produce anything if they’re closed and that stores which aren’t open typically don’t get much foot traffic, the market wasn’t yet accustomed to the kinds of catastrophic visuals which became commonplace as the pandemic unfolded. Indeed, the figure (below) was among the first such charts.
I called that “mind-boggling” at the time. In what now sounds like a laughable understatement, I wrote that “when taken in conjunction with the shocking drop in PMIs released late last month, and the sharp contraction in exports, this bodes poorly for China’s Q1 GDP numbers.” A month later, Beijing reported the first overall contraction since at least 1992.
Fast forward a year, and the country has largely left the pandemic in the rearview. China was the only major economy to post an expansion in 2020, no small feat to be sure.
Now, the incoming data is starting to reflect large base effect distortions. China’s exports, for example, jumped 61% in the January-February period. On Monday, exactly a year after reporting the figures shown in the visual (above), Beijing rolled out activity data for January-February 2021.
The figures were preemptively described as “cloudy,” at best, and meaningless at worst. But it would be a mistake to simply ignore the numbers. For example, some suggested that comparing them to 2019 is a useful exercise. Whatever the case, retail sales jumped 33.8%, better than the 32% the market was looking for. The range was 10% to 39.2%.
The evolution of retail sales is more important at this juncture than factory output. The consumer rebound lagged the industrial bounce by several months in China (you can see that clearly in the chart), leading many to fret about a two-track recovery. As an aside, I’m not sure why anyone was surprised that industrial output would reaccelerate more rapidly than consumption in a command economy.
Eventually, retail sales came around and Beijing began reporting expansions again starting in August. The numbers for this year’s January-February period should help allay some of the lingering angst.
Fixed asset investment disappointed, rising 35% YoY versus consensus of 41%. The surveyed jobless rate rose to 5.5% from 5.2% at the end of December.
Industrial output, meanwhile, jumped 35.1%. In addition to the ambiguity created by the comp with 2020’s lockdown months, the figures are also distorted by efforts to snuff out localized virus outbreaks this year. That meant implementing some travel restrictions during the Lunar New Year holiday, allowing more factories to stay open, which was handy because demand abroad is robust.
While base effects and holiday distortions make interpreting these numbers exceptionally difficult, the market might find some solace in the headline beats on retail sales and industrial output. Analysts will now spend the next several hours sifting through the figures for some key nuance which may or may not be there.
Earlier this month, China set a growth target of more than 6% for this year, a bar which, if you go by consensus expectations, should be easy for Beijing to clear. Forecasters generally see the economy expanding at around 8% in 2021.
The cynical among you will contend that China’s top-tier economic data is contrived anyway, so it’s just a matter of how many grains of salt you need to take it with. Or how many spoonfuls of sugar you need to help the medicine go down.