There was no respite from Chinese economic gloom on Thursday, as Mainland markets came back online after a five-day holiday.
While local shares managed to climb, a horrendous read on the Caixin services PMI underscored the impact of lockdowns on the world’s second largest economy.
The headline print, 36.2, was the lowest since February of 2020 (figure below), and missed consensus by a mile. It marked the second month of contraction and served as a grim reminder of the message conveyed by the official NBS gauge and factory surveys released last weekend.
“Supply and demand in the sector contracted severely,” Wang Zhe, Senior Economist at Caixin, said, citing regional COVID outbreaks, and noting that while input costs fell only slightly, “sluggish demand” meant services companies were compelled to lower their own prices materially. A gauge of prices charged fell into contractionary territory for the first time in eight months. April marked the fourth consecutive month during which the employment subindex printed in contraction territory.
In short: The lockdowns are crippling China’s services sector at a time when domestic demand is still among the most pressing issues for the Party, as Beijing attempts to assuage concerns that the combination of “legacy” drag from the property crackdown and ongoing virus containment measures may have already put the full-year growth target out of reach.
On Thursday, state media suggested new measures aimed at bolstering the economy will be announced soon. Markets want action, not words. Late last week, just prior to the holiday, the Politburo attempted to engineer optimism with another sweeping promise to support growth and wrap up the big-tech crackdown, which has weighed heavily on investor sentiment.
Meanwhile, in Hong Kong, “new” data showed retail sales plummeted nearly 14% in March amid virus restrictions. It was the second straight monthly drop and marked the first instance of back-to-back declines since late 2020 (figure below).
As Bloomberg gently (and dryly) noted, “the full impact of those restrictions is also likely not captured in the data, as the retail sales data covers consumer spending on goods but not services… which account for over 50% of total consumer spending.”
The situation is improving (ostensibly, anyway) and there’s a light at the end of the tunnel. But the point in mentioning these figures is simple: Because Hong Kong is now firmly under the Party’s control nearly two years on from the implementation of Xi’s national security regime in the city, it’ll be subject to the same rolling lockdowns as Mainland cities, and thus vulnerable to episodic economic contractions.
Indeed, data out earlier this week showed GDP fell 4% in the first quarter, three times worse than the contraction economists expected (figure above).
The overarching message is clear: The economic cost of China’s “zero COVID” strategy, and whatever modified version they’re running in Hong Kong, almost surely outweighs the public health benefits considering advances in vaccines, therapeutics and generalized care.
I’m compelled to reiterate this again and again because for every week Xi sticks assiduously to “zero COVID,” the odds of global stagflation increase. That’s especially true in the context of the upward pressure the war in Ukraine continues to exert on the price of food and the fertilizer humans rely on to grow it. The Fed was keen to emphasize those points on Wednesday.
I’ll include my customary caveat. Lockdowns were (and remain) an effective way to combat the spread of a highly transmissible pathogen. But thanks to the protection offered by the vaccines and the availability of therapeutics, the tradeoff between public health and economic considerations bears almost no resemblance to the calculus policymakers were forced to reckon with in 2020.
Part of the problem in China may be low vaccination rates and suboptimal vaccine efficacy, but even a generous interpretation that describes Xi’s efforts as genuine and well-meaning might also include another adjective: Quixotic.
“almost surely outweighs the public health benefits considering advances in vaccines, therapeutics and generalized care.“
If china’s vaccine is impotent against new variants advances in generalized care will go out the window. Our health care system was strained by the virus, China’s will implode in a scenario of rampant virus spread with little help from vaccination. I’m unaware of advances in Chinese therapeutics, but to use western therapeutics is almost certainly untenable to the party, no?
The most important thing in Beijing is social stability. You can’t lock people in their homes forever. Eventually, people are going to get restless and if there’s anything the Party is allergic to, it’s a restless populace. Unless they know something everyone else doesn’t, their vaccine isn’t totally “impotent,” and Omicron isn’t as severe. The longer he doubles down on this, the harder it’ll be to do an about-face. Surely this has occurred to the Party, though, and I imagine there’s a lot of consternation about where to go from here. Because it isn’t working. That’s the bottom line: Even if you go by the official virus numbers, the strategy is failing. They aren’t containing it. Nor will they be able to contain it going forward.
Looking around the globe, you have to wonder how much longer the US economy can remain “hot”. Not much longer would be my answer- by early next year if not sooner I think the party is going to be over.
It is kinda blows any semi-logical brain to smithereens, how both Putin and Xi have all this power and each has gone and shot himself in the foot. Who would have thought two men’s egos could cause so much unnecessary suffering.
very well said !!
This is an astonishing own goal by Xi.
Unlike the Fed, he has tools that will directly address his most immediate problem(s). China could rebrand Western mRNA vaccines and antivirals as their own and get their vulnerable population vaxed, boosted, and treated; that will address Covid. It could also pressure Putin to conclude his special military operation; that will address the coming demand slump from global recession.