China In Dire Straits

Just two days after China’s cabinet tipped the “timely and appropriate” use of monetary stimulus — including reductions to the amount of cash banks are required to hold in reserve — to bolster the flagging Chinese economy, the PBoC followed through with a 25bps RRR cut.

It was the first cut since April (figure below), when the country was groaning under the weight of the Shanghai lockdown.

The cut takes effect on December 5 and should free up 500 billion yuan of liquidity.

Let me just dispense with what I hope is obvious to most readers: This is meaningless. China needs a lot of things right now. A quarter-point RRR reduction isn’t one of them. It doesn’t hurt, but it doesn’t help either. It’s a perfunctory nod to economic malaise that has nothing to do with liquidity or credit provision.

Two weeks into an experiment with softer COVID controls, cases are surging across China, exceeding 30,000 per day, the highest of the pandemic. “COVID zero” plainly has to go, but vaccination rates among those 80 and older are relatively low, and China hasn’t cleared an mRNA shot for domestic use.

Although disaffection with Xi Jinping’s zero tolerance approach to containment is pervasive, so is fear — of the curbs, yes, but also of the virus itself. Three years of “COVID zero” instilled a sense of dread which, for many, may be disproportionate to the biological threat. That could complicate efforts to rekindle the services sector even in the absence of strict curbs.

For now, though, that’s a secondary concern. The appearance of hastily-built quarantine facilities and temporary tent housing for virus control workers in Beijing, along with the conversion of a conference hall to a healthcare facility, suggests the city, which recorded nearly 1,900 cases Thursday, is prepping for stricter controls. For many Chinese, the risk of being ensnared in Xi’s virus dragnet and sent to quarantine outweighs whatever benefits might accrue from non-essential trips. Shopping can mean scanning a QR code, and in the unlucky event you visit an establishment that’s later linked to the virus, you can be tracked down and confined to Party-run quarantine.

Either way — whether it’s fear of infection or fear of government-mandated isolation — Chinese are increasingly reluctant to leave their homes. Of course, staying home carries its own risks, psychological and otherwise in the event mass lockdowns prevent entire residential blocks from receiving adequate provisions. According to a Bloomberg article published Friday, supermarkets in Beijing are well-stocked, but “largely devoid of shoppers,” while home delivery apps are “overwhelmed,” with the nearest delivery spots “a month out, if [they’re] available at all.” Roads are “deserted even during rush hour,” public transit use is down markedly and shopping districts are “empty.”

The capital, it would seem, is in a state of panic — with less than 2,000 daily cases. Of course, that figure would be exponentially higher were it not for the kind of self-quarantining described above, but this isn’t a tenable scenario. COVID isn’t going to be cured. Approval of a Chinese mRNA vaccine could be months away and then you have to get it manufactured at scale and into arms. The economy can’t take this anymore, and neither can the populace.

At Wednesday’s State Council meeting, mentioned here at the outset, the outgoing Li Keqiang emphasized the economy, as is his wont. “We must hold fast to maintain continuous recovery,” a readout published by Xinhua and carried on a government website said. “It is necessary to thoroughly implement a package of policy measures to stabilize the economy, stabilize employment and prices, keep the economy operating within a reasonable range, and strive to achieve better results.” Li, you’re reminded, is likely be replaced as Premier by Li Qiang, who presided over the Shanghai lockdown as Party chair.

The average lag between State Council pronouncements and PBoC action is around five days, but the last two RRR cuts, both of which were implemented amid soaring virus cases, were delivered within 48 hours (figure above).

The effectiveness of monetary policy under the circumstances is debatable. The PBoC on Friday employed the usual boilerplate language about “increasing the support for the real economy” and aiding COVID-damaged industries by freeing up banks to lend. But creeping lockdowns and the proliferation of strict virus curbs will only increase the damage to those industries.

Manufacturing facilities can run on the so-called “closed loop” system, but that’s conducive to cabin fever or, to drop the euphemisms, madness. Attempts to run the system in Zhengzhou prompted workers to flee Apple’s key iPhone production facility last month, and when Foxconn tried to replace them by offering higher pay to new workers, the recruits broke out of dormitories and engaged hazmat-clad officials in something loosely akin to hand-to-hand combat. As for the services sector, see above: No one wants to go out, either because they fear infection or being quarantined.

Against this unfortunate backdrop, demand for credit is sure to be lackluster. So, freeing up lending capacity is an exercise in futility. Worse, China can no longer rely on exports to support the economy given dire forecasts for global growth in 2023, and even if they could, COVID curbs restrict manufacturing activity and hamper port logistics.

On Thursday, 10 people died in an apartment building in Xinjiang, home to Xi’s infamous “re-education” camps for ethnic minorities. “The blaze set off a flurry of questions on Chinese social media about whether COVID restrictions had hampered the rescue or prevented residents from escaping their apartments or the building,” The New York Times wrote, adding that “much of Xinjiang has been under lockdown for more than 100 days [and] in some cases, the lockdowns have left residents in dire straits, with trouble securing food and other necessities, like medication and menstruation supplies.”

It was the second deadly fire this week. On Monday, more than three-dozen people died in a blaze at a Henan factory. The Times quoted an expert on Chinese fire safety, who attributed the slow response from fire fighters on Thursday in part to “road barriers.” As Chang Che and Amy Chang Chien noted, “Makeshift barricades and bolted doors have become a key feature of efforts to prevent people who might have been exposed to the virus from leaving their rooms and buildings.”