China Is Probably In A Recession Too

The world’s largest economy is in a recession. Or not. It depends on who you ask and how you define “recession.” Unfortunately for global growth, the world’s second largest economy is sputtering too.

Market participants frowned at an unexpected contraction in Chinese factory activity on Monday, as the official manufacturing PMI printed 49 for July (figure below). The lackluster read suggested ongoing virus flareups and associated disruptions continued to hamper the economy months after officials declared victory over COVID in Shanghai, following a lengthy lockdown.

As the Google-translated version of the NBS’s official release put it, “the prosperity level of the manufacturing industry declined.” Small and medium-sized companies fared worst.

The Caixin gauge was likewise weak. At 50.4, it managed to stay in expansion territory, but nevertheless suggested activity slowed for a second month. The accompanying color wasn’t overtly dour. Rather, it was indicative of a recovery that simply has no momentum.

For the privately-owned, smaller businesses whose responses comprise the Caixin survey, new orders are rising “only slightly,” and while the recovery from the latest COVID wave is “ongoing,” supporting higher sales, some businesses described demand conditions as “relatively subdued.”

Wang Zhe, Senior Economist at Caixin Insight Group, delivered a mixed assessment that admitted of more than a little cognitive dissonance. Although the color was replete with references to stability and improvement, it was littered with allusions to the tepid, if not entirely fragile, nature of the rebound. “Electricity shortages faced by some companies and scattered COVID outbreaks in some regions were among factors that cut into market demand and confidence in July,” Wang said, describing the manufacturing sector as resting on a “weak” foundation.

A look at the breakdown for the official PMIs wasn’t particularly encouraging. Production and new orders both slipped back below the demarcation line in the factory sector. The figure (below) shows the new orders gauges for the manufacturing and non-manufacturing PMIs.

Although the headline read on the official non-manufacturing PMI was solid, at 53.8, it nevertheless decelerated from June’s big rebound, led lower by services, where the expansion moderated.

Employment gauges in both PMIs remained in contraction territory. Premier Li Keqiang has made stabilizing China’s employment situation a priority. Often enough, that imperative is complicated by Xi’s strict adherence to “zero COVID.”

The PMI data came as Chinese authorities continue to grapple with boycotts in the property sector, where separate data showed China’s top 100 developers suffered a near 40% YoY drop in sales last month, not much better than June’s plunge. Home prices are mired in a 10-month streak of declines (figure below).

Legacy drag from Xi’s aggressive property sector curbs is proving virtually impossible to counter.

Growth in the second quarter was the most anemic since the original Wuhan outbreak and the Party’s full-year target is now laughable. The Chinese economy won’t expand by 5.5% in 2022. In fact, it probably won’t expand at all. I’d venture that if it were possible to accurately measure Chinese economic activity (it’s not), we’d discover that China is in a recession.

But we’ll never know. In all likelihood, the Party will gently recalibrate expectations over the next several months on the way to claiming, at year-end, that growth was somewhere in the neighborhood of 5%. Nobody will believe it, but everyone will pretend.

Meanwhile, China Beige Book International released the latest installment of their own, independent assessment of the Chinese economy. It was characteristically — and I’m trying to find the right adjective here — forthcoming.

“Markets are convinced that easing lockdowns mean the worst is over, but July data show that firms are still largely refusing to invest, borrow and especially now, hire,” CEO Leland Miller said. “This is likely because companies simply do not believe that their ‘COVID zero’ nightmare is over.”