The Chinese economic expansion slowed in the fourth quarter, but not nearly as much as expected, data out Monday showed.
GDP growth in the world’s second largest economy was 4% (figure below), well short of the prior quarter’s 4.9% pace. The deceleration was a testament to the drag from myriad overlapping crises, including a sharp property downturn and power shortages.
The slowdown was expected. Growth estimates from 40 economists ranged from 2.6% to 4.5%.
Trade was the lone bright spot in Q4. Robust exports bolstered the yuan and helped mitigate downward pressure exerted by property curbs, regulatory tightening, strict COVID containment protocols and an acute electricity crunch. China posted a record surplus in 2021.
As the Chinese economy rebounded from the unprecedented contraction precipitated by the pandemic, the PBoC stuck assiduously to the script. After easing to cushion the blow from the original lockdowns, monetary policymakers were careful to avoid “flooding” the market with stimulus, resorting instead to piecemeal measures and targeted accommodation even as their developed market counterparts cut rates to zero and deployed their balance sheets in a frantic bid to engineer a V-shaped recovery.
By November, though, it was clear Chinese officials had reached the pain threshold. The combination of the real estate slump, regulatory crackdown and power shortages dealt a grievous blow to growth expectations. It was too much.
An RRR cut on December 6 and news that the PBoC also lowered the relending rate for SMEs suggested China had already embarked on an easing cycle, even if officials avoided branding it as such. The one-year loan prime rate, the de facto policy rate, fell for the first time in 20 months in December, while a statement released following the PBoC’s regular Q4 meeting clearly telegraphed the central bank’s intent to actively support the economy.
On Monday, the PBoC cut both the one-year MLF rate and the seven-day repo rate by 10bps (figure below).
The PBoC watchers among you will note that December’s LPR cut wasn’t presaged by a reduction in the MLF rate — banks appeared to act of their own accord.
By design, LPR is priced off MLF, so Monday’s cut ostensibly opened the door to another LPR reduction on January 20. But that’s not how analysts saw it headed into this week. Rather, consensus appeared to be that a cut to the MLF rate would simply bring it back in line with the LPR trajectory. But the 10bps move was twice as large as last month’s LPR cut. And the PBoC offered 700 billion yuan of MLF against 500 billion yuan maturing. You can draw your own conclusions.
The policy divergence between China and the rest of the world is now going in the opposite direction — other major central banks are tightening and the PBoC is easing, albeit in dribs and drabs. Last week, a cooler-than-expected read on factory-gate inflation and a similarly benign CPI print bolstered the prospects for PBoC action.
Also on Monday, China reported retail sales, industrial production and fixed asset investment figures for December. The numbers weren’t particularly encouraging.
Retail sales rose a mere 1.7% YoY (figure below), a very poor showing. Consensus expected 3.8%. No economist predicted a print below 2.5%. The range of estimates was 3.1% to 4.1%.
Markets are concerned about domestic demand in China, especially as Omicron tests Xi’s resolve around the Party’s increasingly quixotic “zero COVID” strategy. December’s trade data showed imports rose far less than expected last month. Whatever synonym for “bad” you care to employ while describing the latest retail sales print won’t be hyperbole.
Industrial production, meanwhile, came in ahead of estimates, perhaps suggesting the worst of the drag for China’s factories is over. Fixed asset investment was in line. The surveyed jobless rate ticked higher. Property investment decelerated.
Ultimately, Monday’s data and news flow did little to change the narrative. The Chinese economy is struggling, and policymakers are in the process of orchestrating a slow motion pivot aimed at ensuring growth remains in a respectable range.
Success isn’t assured, but as countless skeptics have learned the hard way over the past decade, neither is failure.
