Chinese Economy Flatlines, Further Imperiling Full-Year Target

The Chinese economy barely grew during the second quarter, data out Friday showed.

At 0.4%, the rate of expansion represented a dramatic deceleration from Q1’s pace, and would appear wholly anomalous out of context.

In context, the anemic print was a testament to the cost of Xi Jinping’s strict COVID containment strategy, which virtually all nations, irrespective of political persuasion or geostrategic affiliation, view as anachronistic. You won’t find many vocal critics of Xi’s public health policies among China’s allies, but you won’t find anyone willing to adopt them domestically either, which tells you all you need to know.

Outside of the unprecedented contraction that accompanied the original lockdowns, there’s no precedent for China’s Q2 slowdown (figure above). The range of estimates from nearly three-dozen economists was -1% to +3.8%.

It’s exceedingly difficult to imagine China hitting this year’s growth target (around 5.5%), but then again, these figures are malleable. At the end of the day, growth is just whatever Xi says it is.

With virus cases flaring anew, market participants are palpably concerned about another round of movement restrictions and the potential for new containment protocols to prolong the supply chain disruptions contributing to runaway inflation in advanced economies. Exports picked back up in June, as did credit growth, but the situation is urgent.

Read more: Meanwhile, In China…

During this week’s State Council meeting, officials agreed to redouble efforts to stabilize the jobs market, which is a continual source of consternation for Premier Li Keqiang. Although Beijing said employment improved last month, more support is necessary.

Discrimination against workers who’ve recovered from COVID is “strictly banned,” the State Council said. Violators “will be punished.” Loans are being doled out to entrepreneurs and Beijing is actively seeking to bolster small businesses in an effort to create jobs. The Party is also promoting upgrades to household durables in rural areas.

Activity data for June, released concurrent with the second quarter growth figures, showed retail sales rose 3.1% (figure below). That was much better than the minuscule increase economists expected.

Reviving domestic demand was an uphill battle in the COVID era. The April-May lockdown-driven collapse was a grievous setback. Sluggish imports in June didn’t inspire much confidence and there’s a very real sense in which China is perpetually on the brink of seeing consumption crater again given the likelihood of ongoing virus flareups in Shanghai and, possibly, Beijing.

Industrial output rose 3.9% in June, while fixed investment increased 6.1% from January through last month. Economists expected 4% and 6%, respectively. The surveyed jobless rate for last month fell sharply, to 5.5% from 5.9%.

Given Xi’s commitment to eradicating an endemic virus, Friday’s data won’t do much to allay pervasive uncertainty. The overhang from the regulatory crackdown continues to weigh on investor sentiment and the legacy of last year’s property curbs casts a long shadow.

Offshore debt defaults are piling up. Missed payments now exceed $26 billion for 2022, nearly double 2021’s full-year total. The vast majority of those delinquencies are tied to property developers. Onshore defaults are down dramatically, but that’s thanks in no small part to firms’ capacity to foist new terms, including maturity extensions, on creditors who lack legal recourse. Failure to resuscitate the property sector may mean scores of lost jobs, and absent a revival, growth could be perpetually hamstrung.

Remarkably, borrowers are now refusing to make mortgage payments on pre-sold units. The boycott encompasses nearly 90 cities, according to SCMP. Buyers’ demands aren’t unreasonable: In many cases, they just want construction to resume on unfinished properties.

The standoff is a problem for Chinese banks. As Bloomberg noted, “Chinese lenders already grappling with challenges from liquidity stress among developers now also have to brace for homebuyer defaults.”

Of course, the bigger concern for the Party is social unrest. Out of all homes pre-sold between 2013 and 2020, less than two-thirds were delivered, according to Nomura. A restive populace is a total non-starter for Xi, especially in a politically sensitive year.