China’s economic activity plummets under Xi’s Covid Zero policy
Industrial production unexpectedly fell 2.9% in April from a year ago, while retail sales contracted 11.1% in the period, weaker than an expected decline of 6.6%. The unemployment rate climbed to 6.1% and the youth unemployment rate hit a record high. Investors reacted by selling everything from Chinese stocks to US index futures and oil.
China’s economy has been hit hard by the government’s stringent efforts to keep the virus at bay, with major cities like Shanghai locked down for several weeks and restrictions in many other places slashing spending, closing factories and blocking chains supply.
The government has doubled down on its Covid Zero strategy, even though the high transmissibility of the omicron variant puts cities at increased risk of repeatedly locking down and reopening. The zero-tolerance approach has drawn criticism from businesses, fueled public frustration and made Beijing’s ambitious annual growth target of around 5.5% out of reach.
China’s major financial newspapers on Monday published a six-month-old speech by President Xi Jinping on the need to preserve jobs and sustain growth, a sign of greater urgency to support the economy. Soaring unemployment is of particular concern to the Communist Party ahead of a two-decade leadership reshuffle later this year, when Xi is expected to secure an unprecedented third term.
“They prioritized zero-Covid over economic growth in April, but they want both for the whole year,” said Larry Hu, head of China economy at Macquarie Group. sell out politically, especially in a year of such significant political significance.”
Monday’s data suggests gross domestic product fell 0.68% in April from a year ago, the first contraction since February 2020, according to estimates from Bloomberg Economics. Growth could weaken to less than 2% in the second quarter, according to UBS Group AG, while S&P Global Ratings predicted it could be as low as 0.5%.
As Shanghai takes the first steps towards reopening by allowing some stores to gradually resume operations from Monday, there is optimism that last month’s data could mark the worst of the crisis. However, many people remain confined to their homes under strict lockdown measures in Shanghai and the city’s vice mayor said on Sunday that normal life and production would not fully resume until mid-June to the end of June.
China’s benchmark CSI 300 stock index closed down 0.8%, with healthcare and consumer staples stocks the worst performers. The onshore yuan weakened 0.1% to 6.7957 to the dollar as of 5:04 p.m. local time, while the yield on 10-year government bonds was little changed at 2.82%.
Disruptions in China, the factory of the world, are worsening the outlook for global growth and complicating the inflation picture. Supply chain issues have plagued businesses from Tesla Inc. to Apple Inc., while export growth slowed last month to the weakest pace since June 2020, as operations at the world’s largest port world in Shanghai have taken a hit.
Chetan Ahya, chief Asia economist at Morgan Stanley, said supply chain pressures likely peaked in April and there was optimism of some improvement going forward.
“It looks like you’ll see some sort of solution to China’s supply chain issues over the next few weeks,” he said in an interview on Bloomberg TV. “And the reopening of Shanghai is certainly an important factor that we are looking at as well. . So yes, there are going to be a lot of challenges for the rest of the world, but it looks like the worst is behind us.”
What Bloomberg Economics says
“China’s April activity data laid bare the damage wrought by the Covid lockdowns in Shanghai and other parts of the country. The impact was much wider and deeper than expected.”
“The data points to a bigger slowdown this year than expected.”
Chang Shu and Eric Zhu
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Beijing has signaled that policymakers will step up support for the economy, with Premier Li Keqiang recently urging officials to ensure stability through fiscal and monetary policy.
The People’s Bank of China took action on Sunday to ease the housing crisis by cutting mortgage rates for first-time home buyers. However, he left the interest rate on one-year loans unchanged on Monday as inflationary pressures and worries about capital outflows reduce the possibility of further easing.
“It’s clear that the impact of the lockdowns, or the fear of lockdowns, has outpaced any economic easing, and the Shanghai lockdown has had ripple effects across the country,” said Wei Yao, head of research for the Asia-Pacific and Chief Economist at Societe Generale SA. If soaring unemployment “doesn’t raise the urgency of adjusting zero-Covid measures to allow the economy to normalize, we don’t know what will,” she said.
The National Statistics Office said the Covid outbreaks had a “significant impact” on the economy in April, but the effects are expected to be short-lived. “With the progress of Covid controls and policies to stabilize the economy, the economy is likely to recover gradually,” he said, adding that he did not expect GDP to recover. contracts in the second trimester.
Investment in fixed assets remained a bright spot, rising 6.8% in the first four months of the year, likely supported by government efforts to increase infrastructure spending. However, the figure does not match monthly data showing a fall in manufacturing and materials used in construction – cement production fell 18.9% in April; production of crude steel and steel products fell by more than 5%; car production plunged 44%; and total manufacturing output fell 4.6%.
Power generation fell 4.3% in April from a year ago as demand for power from factories to steel mills and shopping malls fell amid virus restrictions.
Monetary stimulus is proving less effective in the face of Covid lockdowns, with Friday’s data showing businesses and consumers had little appetite to borrow in April. Credit growth weakened sharply last month, with new yuan lending falling to its lowest level since December 2017.
Despite the PBOC’s unchanged stance on policy rates, banks could cut their key policy rates on Friday, which would help lower mortgage rates for homebuyers further. However, economists say the impact will be quite limited.
China’s housing market is a crucial source of growth for the national economy, but it has been in recession for nearly a year, with sales falling at a double-digit pace every month since August 2021 and new home prices falling. also after a government crackdown on indebted property developers.
Investment in property development fell 2.7% in the first four months of the year, while the value of home sales fell 32%, the data showed.
“The biggest problem we see right now is the current ongoing pressure on credit, and to the extent that business confidence is shaken, and therefore credit demand is now fundamentally damaged,” Helen Qiao, Economist for Greater China at Bank of America, said in an interview with Bloomberg TV. “And so it takes more than just lower interest rates to stimulate demand for credit.”
(Updates with Xi’s comments, additional details.)
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