China’s Retail Sales Plunge As Key Data Highlights Lockdown Cost

Chinese economic activity decelerated sharply in April, data out Monday showed.

Despite near daily assurances from policymakers, authorities in Beijing have struggled to convince a skeptical world that the Party’s 2022 growth targets are still achievable amid strict virus containment protocols, including a lengthy, arduous lockdown in Shanghai and fears of a similar scenario in the capital.

Retail sales plunged 11.1% YoY last month, according to Monday’s figures. Consensus expected a 6.6% drop. The range of estimates, from two-dozen economists, was -10% to -3.6%. It was the steepest decline since 2020 and would appear wholly anomalous outside the pandemic context (figure below).

Industrial output shrank 2.9% against expectations for a slight increase. Fixed investment grew 6.8% from January through April, a touch below forecasts. Property investment slumped, and residential property sales fell further.

It’s fair to call these numbers concerning. PMIs released late last month hinted at the escalating cost of COVID containment. The lockdowns are crippling China’s services sector at a time when domestic demand is still among the most pressing issues for the Party.

Officials’ attempts to assuage concerns about the combined impact of virus measures and “legacy” drag from the property crackdown seem increasingly belabored. Over the weekend, the PBoC lowered a floor on mortgage rates in an effort to stimulate demand. First-time buyers can now borrow at 20bps below the five-year LPR rate, or 4.4%.

Credit growth was anemic in April. Banks offered just 645 billion in new yuan loans, the least in more than four years and nowhere near estimates (figure below). Total financing was the weakest since the onset of the pandemic.

The PBoC took the rare step of editorializing around the credit data last week, noting a “sharp” drop in demand from small businesses. “The environment has become more complex and grave due to challenges from the COVID outbreak and the crisis in Ukraine,” the central bank said. Mortgages shrank by more than 60 billion yuan.

On Monday, the PBoC left the medium-term lending rate unchanged. While that doesn’t rule out a small reduction in the loan prime rates later this month, it does make it less likely. I suppose if demand for credit is lackluster and liquidity is ample, it makes little sense to ease.

Some have suggested the PBoC is wary of easing in the face of aggressive Fed tightening. The widening policy divergence is contributing to yuan weakness, and while a weaker currency can help prop up exports, which grew at the most anemic pace in 23 months in April, rapid depreciation could exacerbate outflows.

The yuan is trading at its weakest levels in years. USDCNY breached 6.80 last week. At 2.1%, CPI rose more than expected last month, while factory gate inflation was also hotter than anticipated (figure below).

Beijing blamed the virus and commodities for rising consumer prices. Needless to say, the threat of lockdowns encourages citizens to stockpile basic necessities. That demand pull-forward can put upward pressure on prices, while exacerbating shortages and increasing the burden on already strained supply chains.

Despite mounting evidence of an unsustainable economic toll, there’s no sign Xi is prepared to give up on “COVID zero,” especially not in a politically sensitive year. Earlier this month, the Politburo’s Standing Committee made it clear that Xi’s strategy is beyond reproach. The Party will “fight against any speech that distorts, questions or rejects our country’s COVID-control policy,” the Committee said. The policy, authorities insisted, is “scientific and effective” and will “stand the test of history.” There was no mention of the economy.

There’s some speculation about a rift at the highest levels of the Chinese government. During a May 7 nationwide teleconference, Premier Li Keqiang delivered a dark assessment of the country’s employment outlook, which he described as “complicated and grave.” Monday’s figures showed the surveyed jobless rate rose to 6.1% in April, higher than expected.

Shanghai was set to gradually reopen some businesses, but the situation in Beijing remained ambiguous. Bloomberg published a compendium of stark visuals under the headline “China Says Beijing Isn’t Locked Down. These Pictures Tell a Different Story.” “I’ve endured 20 days of lockdown in Beijing. No one can tell me when it will end,” an SCMP headline read.

Just as Monday’s dire data hit markets, an official said Shanghai “aims to restore the normal order of life in June.”