The Chinese economy exhibited further signs of moderation in October, but data out Monday was considerably better than expected.
Retail sales rose 4.9% YoY last month (figure below), far quicker than the 3.7% economists expected and above the highest estimate. It was the second consecutive monthly beat.
The relatively upbeat read on consumption comes as Beijing grapples with the worst COVID outbreak since the onset of the pandemic. China is the world’s last major “COVID zero” holdout, and many observers worry Beijing’s quixotic efforts to keep a country of 1.4 billion completely free of symptomatic cases is an exercise in futility, guaranteed not just to fail, but to undermine economic activity at the possible expense of global growth.
To be sure, China’s draconian policy towards outbreaks has produced its share of farcical outcomes. Two weeks ago, for example, Xi locked thousands of people inside Shanghai Disneyland, tested all of them, then shipped them home on more than 200 specially chartered busses. Everyone was negative.
Recently, in Hebei Province, hundreds of packages were screened after workers at a factory that produces children’s clothing tested positive. As The New York Times recounted, “officials went even further [in Guangxi] testing every person who had touched or even received a package from the factory.” No one outside the factory had the virus.
It’s difficult to discern how much of the deceleration in retail sales growth (note that the pace is still less than ideal, October’s beat notwithstanding) is due to virus restrictions or fears of contracting the disease, and how much is attributable to other economic headwinds and a generalized waning of momentum following the country’s V-shaped, “first in, first out” recovery from the initial COVID wave in early 2020.
Industrial output rose 3.5% in October, Monday’s data showed. That was easily ahead of estimates, but things are far from normal. China’s factories are beset by an acute power crunch and soaring input costs, even as global demand for Chinese exports continues to boom. Factory inflation surged the most in 26 years last month, and passing along higher costs to consumers is easier said than done (figure below).
“The impact of the power crunch seemed to be easing slightly, thanks to the series of policy measures the government has taken to step up coal production and stabilize coal prices,” SocGen’s Wei Yao and Michelle Lam wrote, prior to the release of the October data. Still, they said, industrial activity is likely to “remain tepid” considering headwinds including “continued curbs on energy-intensive production.”
“Tepid” is probably the best adjective for the retail sales and IP numbers. If you wanted to be generous, you might say the above-consensus prints demonstrate “stabilization.”
One thing that hasn’t stabilized, though, is the property sector. Despite assurances from officials that Evergrande is contained, each weekday brings fresh evidence of spillovers. Late last week, reports suggested Beijing is in the process of easing some of the curbs responsible for the downturn currently squeezing the world’s largest asset class (figure below, from Goldman).
Evergrande continues to dodge death, making overdue coupon payments within 30-day grace periods in order to avert default. But the last minute payments don’t change the facts on the ground. The company is almost surely headed for some manner of restructuring. That’s an albatross around the necks of other developers.
That’s the context for the decline in the pace of fixed asset investment for the year through October. Growth eased to 6.1%, down sharply from 7.3%. “Despite policymakers stepping up rhetoric to ensure ‘reasonable’ funding for healthy developers, the funding situation remains dire,” SocGen’s Lam remarked. Property investment for January through October rose 7.2%, down from 8.8% from January through September.
Ultimately, the numbers do little to change the narrative. China is decelerating at an inopportune time. Policymakers in developed markets are pondering the prospects for their own economies as the fiscal impulse from pandemic stimulus wanes and central banks nervously eye elevated inflation with an inclination to tighten policy at the risk of exacerbating burgeoning slowdowns.
As ever, it’s worth reiterating that Chinese policymakers are no strangers to juggling competing priorities. But to say the stakes are much higher than usual would be to materially understate the case.
Chinese leaders, policy makers, and economists enjoy no sympathy from me. They’re positioned to keep all the “spinning plates” spinning because each plate has persons responsible to keep it so.
They can afford to do this because every day of every year since the 1990s the United States and Europe have been sending shipping containers full of money to China in exchange for lowering the costs of our products.
In the 1970s Nixon foresaw the inevitable rise of the Chinese and courted them, offering a hand of partnership. But the proposition of partnership with the Chinese ages from the US perspective. They can afford to push us aside because we are running out of people to meet the challenge of competing with them. We are aging, looking more like central European countries. And very soon they’ll possess more wealth than the US.
Furthermore, because they have so many people becoming educated and successful in recent years, they now aspire to expand their military (and hubris) and become a dominant and threatening military power. They clearly resent the utter dominance of the US since WWII.
The space economy is the only place where I can foresee the US may find higher ground. But they’re certainly moving in the same direction.