China on Thursday turned in a set of activity data for May that was perhaps not as bad as feared under the circumstances.
That assessment comes with too many caveats to plausibly enumerate, and it’s anyway not saying much. These figures are difficult to parse in real-time beyond the headline prints, which were ok-ish, if readers will forgive the informal cadence.
Retail sales rose 12.7% YoY last month, Beijing said. That counted as a miss, but it wasn’t too wide of the mark. Consensus wanted 13.7%.
Even if you’re exceptionally adept at breaking down these series into their constituents (i.e., even if you’re a China economist at a bank), base effects from 2022’s first half COVID lockdowns are still distorting the comps.
Recall that in April, analysts were disappointed when the activity figures failed to clear a very low bar. The numbers looked good on the surface, but when you considered the comparison month (i.e., the Shanghai lockdown), they were underwhelming.
Domestic demand in China remains weak. Credit growth data for May was lackluster, inflation is nonexistent and so on. I don’t think Thursday’s ostensibly passable retail sales print is going to materially alter that narrative.
Industrial production rose 3.5%, in line with estimates, and cumulative fixed investment for the first five months of the year rose 4%, well below consensus.
Markets have turned wholly skeptical of the Chinese recovery story over the past several months, an about-face from the optimism that prevailed at the beginning of the year, following Xi’s decision to abandon “COVID zero” (and we shouldn’t forget the human tragedy that unfolded in China during December and January as the virus was loosed).
The first half of this year was supposed to be defined by a robust recovery for the world’s second-largest economy and a downturn in the largest. Notwithstanding March’s banking sector stress in the US, the opposite happened. The Chinese economy never found its footing and the US steamed along courtesy of a seemingly bulletproof labor market.
Shortly before Thursday’s data was released, the PBoC cut the key one-year MLF rate by 10bps, virtually guaranteeing reductions to the loan prime rates later this month.
The MLF cut was telegraphed earlier this week, when the central bank reduced the seven-day reverse repo rate. These rates were last cut in August.
Analysts generally expect additional cuts, as well as more RRR relief for banks as the year unfolds. Media reports suggest top officials are busy crafting dozens of new stimulus measures to help allay concerns both at home and abroad.
China’s youth unemployment rate hit a new record in May at 20.8%.
Related:
Markets Are Giving Up On China’s Recovery Story+
Of course, China’s Covid policies were obviously destructive. But the CCP asserts that it is in charge. And the people of China need to have faith in that, even though they probably do not wish to do so.
I’m sympathetic to China’s people, especially the youth who are unemployed and trying to imagine how to engage in their economy and build a life that includes the possibility of growth and wealth. But CCP decisions in favor of regimented policies dictated by the party and require party control have a negative impact on wealth-building by individuals and have a dulling influence on western participation in China’s economy. That undercuts the volume of opportunities for unemployed young Chinese, limiting the options they can explore for work.
Who can know the way out of this predicament for China and its young people seeking work. But as western companies leave China, the opportunities are only going to dry up even more.
I fear that the next step for China has to be a complete take over of Taiwan in order to bolster the Communist party through military and economic gain. Then install a puppet government in Taiwan – a playbook that has already worked for Xi in Hong Kong.
No way the US can defend an island that China wants, which is only 100 miles offshore from China, even if the US wanted to. The GDP of Taiwan is about $800B and China’s GDP is about $20T. – so not a bad prize for Xi.
Plus, China needs jobs for that 21% of China’s youth, who are currently unemployed. The Taiwanese who are not sympathetic to Xi can be replaced with the unemployed youth from Mainland China.
The best defensive might be to continue to relocate as much GDP from Taiwan as quickly as possible and then to destroy the existing factories that are currently in Taiwan.
Even if the Taiwanese organize a “resistance”, it is hard to think that such a resistance could force China to retreat.