Chinese economic activity perked up in May, crucial activity data out Wednesday suggested, but the outlook remained tenuous.
Retail sales fell 6.7% from the same period a year ago, the latest figures showed. That was slightly better than expected, but nevertheless marked a dubious encore following an 11% plunge the prior month (figure below). The range of estimates was -18% to -1.5%.
Industrial output managed a small gain. Economists predicted a 0.9% drop.
Fixed asset investment for January through May rose 6.2%, a bit better than consensus. The decline in residential property sales accelerated to -34.5% YoY over the same stretch.
Although the Party is adept at balancing competing priorities, the pandemic (and particularly Xi Jinping’s approach to controlling it more than two years after the virus first emerged in Wuhan) continues to bedevil the world’s second largest economy.
A strict lockdown in Shanghai and similarly draconian measures in the capital, jeopardized economic targets at a time when growth was still suffering from the lingering effects of a sweeping property crackdown and the legacy of Xi’s aggressive regulatory blitz, which ensnared the country’s tech titans, bruised investors and prompted some analysts to declare Chinese equities uninvestable.
Over the past two months, officials worked to restore confidence and bolster sentiment via a dizzying array of support pledges and promises to wind down yearlong probes into platform companies. Last week, reports that Beijing was close to lifting a ban on ride-hailing giant Didi were greeted warmly by markets, as were rumors that Ant Group’s star-crossed IPO might eventually be revived.
But Xi’s refusal to concede that “zero COVID,” when interpreted literally, isn’t possible, means the Party’s growth target is almost surely out of reach. It’s now very difficult to imagine the economy growing 5.5% this year, with the caveat that growth is always just whatever officials say it is. Shanghai and Beijing are still struggling to eradicate the virus, which makes sense because, again, eradication is impossible.
Futile or not, Xi demanded “unwavering” adherence to protocol while traveling in Sichuan last week, even as he emphasized the importance of safeguarding “social stability” by “reassuring” citizens, an apparent allusion to the economy and employment. The surveyed jobless rate for May was 5.9%, Wednesday’s data showed, down from 6.1% in April.
Premier Li Keqiang’s urgent cadence when discussing the economy in April and May prompted some to speculate that Xi and Li are at odds over the wisdom of insisting on strict virus containment measures even if doing so means risking an economic contraction. If there’s any rift, it scarcely matters. Xi has established what amounts to one-man rule and he’ll cement his Mao-like control later this year.
China’s export machine tried to rev back up in May, data out last week showed. Shipments grew nearly 17% last month on the heels of a worryingly tepid gain in April (figure below). Imports also rose more than expected.
The export recovery has the potential to persist for another month, maybe two, and the Biden administration is reportedly considering tariff relief in an effort to ease price pressures for US consumers.
But demand concerns continue to cast a pall over the outlook. Global demand for Chinese goods may decelerate materially going forward, both due to goods-to-services switching and consumer retrenchment in Western economies where inflation is raging out of control, forcing households to choose between food and fuel or more “stuff” — not much of a choice, really.
Plainly, factory shut-ins and port closures associated with the Shanghai COVID battle were a logistical impediment in April. The read-through for the global supply chain, and thereby for global inflation, was dire, even as consumer price pressures remain relatively muted in China.
At the same time, lockdowns and generalized angst continue to weigh on domestic demand. People who are locked indoors can’t shop, and the negative vibes from the property slump and stock market malaise are a psychological drag.
And then there’s credit demand, which likewise suffered at the hands of the virus curbs, effectively limiting the PBoC’s capacity to stimulate the economy. Although aggregate financing and new yuan loans picked up in May after diving in April (figure below), the rebound was in part attributable to short-term lending, which suggested both households and corporates lack conviction.
Last month, banks reduced the five-year loan prime rate (a reference for home mortgages) by the most on record after the PBoC lowered the floor on mortgage rates. Taken together, the measures meant first-time buyers can enjoy a 35bps reduction in financing costs. In April, the PBoC delivered what some characterized as a weak-willed RRR cut.
Monetary policy in China is, at least to a degree, constrained by the Fed’s aggressive hiking cycle. The widening policy divergence could contribute to unwanted currency weakness and capital outflows, especially given the Fed’s newfound zeal for a Volcker-style approach to America’s inflation problem. That said, CPI in China is just 2.1%, and factory gate inflation has ebbed meaningfully since peaking in October, ostensibly freeing the PBoC to ease. The key one-year MLF rate was left unchanged Wednesday.
Ultimately, there was little in Wednesday’s key data to support the contention that the Chinese economy is on the verge of inflecting decisively for the better. If anything, the odds are still in favor of an inflection for the worse, if not for the worst, given Xi’s commitment to an unwinnable battle with Mother Nature.
