Headlines centered around China’s economy Monday after the latest batch of key data painted a mixed picture and the PBoC cut rates amid multifarious headwinds.
The read-through from China’s Q4 GDP numbers, December activity data and the PBoC’s MLF cut was clear enough. Notwithstanding the better-than-expected headline growth print, the economy is still under pressure. Retail sales were exceptionally weak last month and the MLF cut was twice the size of December’s reduction in the de facto policy rate. That conveys palpable policymaker angst.
“The already weak consumption momentum weakened further in December, as more signs of deterioration emerged in the labor market, the housing sector continued to struggle and confidence in both the household and corporate sectors remained muted,” SocGen’s Wei Yao and Michelle Lam wrote. “Judging from the PBoC’s policy rate cut just hours before the data release, even policymakers are unconvinced by the [headline GDP numbers],” they added, suggesting the central bank is “probably very concerned by the Omicron spread.”
Read more: China Cuts Rates As Retail Sales Crumble, Economy Stumbles
A Bloomberg article underscored the notion that the Party is losing the battle to contain and otherwise stamp out Omicron. “China has detected locally-transmitted infections in Beijing, the financial center Shanghai, and Guangdong, where the southern technology center of Shenzhen is located, which together account for one-fifth of the country’s GDP,” the piece read, noting that “the simultaneous emergence” of the variant in China’s power centers is “creating bigger hurdles for government officials since aggressive efforts to contain the virus, including lockdown measures, are less feasible in politically and economically crucial areas.”
That, ahead of the Winter Olympics, which Xi on Monday promised would be “simple, safe and splendid.” He spoke via video link to the World Economic Forum “in” Davos. During his remarks, Xi chided developed market central banks for abrupt policy pivots with the potential to destabilize emerging markets (video below).
“If major economies take a U-turn in their monetary policies, there would be serious negative spillovers,” he warned, on the way to exhorting developed nations not to “slam on the brakes” lest they should “present challenges to global economic and financial stability,” the “brunt” of which would fall on developing nations.
It’s no coincidence that Xi is concerned about monetary tightening in advanced economies just as the PBoC embarks on an easing cycle. Although the attendant monetary policy divergence could help alleviate any unwanted appreciation pressure on the yuan, relentless Fed tightening would introduce yet another variable into an already complex policy calculus in Beijing.
He also cautioned on disrupted supply chains, elevated commodity prices and scarce energy, risks which “compound each another.” Xi should know. In October, China leaned aggressively into an effort to bludgeon raw materials prices into submission when a self-inflicted power shortage threatened to snowball into a crisis.
Ultimately, Xi said, China’s economic fundamentals are “unchanged.” The world’s second largest economy “remains resilient, has sufficient potential and positive long run prospects.”
That may well be, but right now, market participants are concerned about the near-term prospects. And so is the PBoC.
“The rate cut today is the most significant easing measure so far in this cycle,” SocGen’s Lam went on to say Monday, adding that the cut “paves the way for a further 10bps drop in the one-year LPR this month.”
ANZ’s Zhaopeng Xing said China might cut RRR again soon in a bid to squeeze in as much easing as possible ahead of the Fed’s tightening cycle. LPR may be reduced by 10bps this week, Xing added, calling Monday’s rate cuts a reflection of policymakers’ “strong intention to stabilize GDP growth preemptively.”
Monday’s cuts were “steeper than expected, highlighting downward economic pressure,” Standard Chartered’s Becky Liu said. She too sees another RRR cut in the offing.
As ever, I’d note that as important as the Fed is, the ebb and flow of sundry global cycles has become increasingly tethered to the Chinese economy and credit impulse over the past decade. Thankfully, the country still has “sufficient potential,” as Xi put it.
Xi is first to say it out loud. Emerging markets. I was wondering where I would hear the first concern about that with the Fed tightening.
They purposely deflated one part of their stock market before they Eased.
Covid whack-a-mole made it certain to happen at some point
H et al: I’m wondering about aggregate USD China Real Estate bonds. Has there been much analysis from the big research houses on the risk? Would USD strength and or higher interest rates cause what appears from the outside to be a house of cards to crumble?
Yes, these are the things I wonder about in my spare time. I probably need a hobby.
Welcome to the club! You know you have a problem when you start reading quantitative macroeconomics papers because there’s nothing to watch on Netflix.
A Straights Times article last week brought out a point I’ve not seen in other coverage. China’s commitment to Covid Zero is not based solely on effectiveness, pride, or determination. Because the Sinovac vaccine has proven to be basically useless against Omicron, Covid Zero is the only measure they have to manage the hospitalization rate, in contrast to countries like the US where the mRNA vaccines in use have been credited with reducing hospitalizations. China is now racing to develop a domestic mRNA vaccine / booster, but it may be too late to help much with Omicron. So in the scenario where the Covid Zero policy “fails” and Omicron becomes more widespread in China, they will still likely need to resort to draconian lockdowns to minimize a crisis in healthcare, no matter how prevalent Omicron becomes and no matter how ugly the economic impact is. Clinging to Covid Zero down the road may appear pridefully senseless to westerners, but it won’t be. In the containment failure case, the economic implications of lockdowns and mass testing as the only tools will potentially become dire and, at best, present leaders with difficult tradeoffs on where to provide life support: patients or the economy. I think beating Omicron is a pretty tough ask and Beijing knows it; I suspect some of the current easing in China may be anticipatory. The implications of Covid Zero for the US have already been recognized, but I suspect some folks may not understand just how long China’s fight could drag out the pain over here. Fighting Omicron city block by city block, factory by factory, successful or not, will assuredly be slow.