Why This Chinese Downturn Is Different

China’s largest city has spent most of the past two months in a state of suspended animation. It’s no surprise that the economy has been hit hard. What is surprising is the lack of a clear, reliable plan to turn the tide — unlike anything like it.

China’s big April economic figures, released on Monday, were sobering enough. Retail sales fell 11.1% year-on-year – roughly the same as in March 2020 during the initial shutdown after the outbreak essentially shut down China in early spring. Industrial and investment growth also weakened, albeit less dramatically, with a 2.9% decline from a 5% gain in March.

But what really got investors to sit up and pay attention was how muted the official response to all of this was. While there’s been a lot of talk about the need to boost the economy at the highest levels of government, the reality is that so far, the actual policy response has been woefully inadequate.

The credit and interest rate environment in China currently speaks volumes. Growth in the broadest measure of outstanding credit across the Chinese economy — the so-called financial aggregate for the real economy — fell back to 10.2% year-on-year growth in April, leaving this trend essentially unchanged from the end of 2021. That’s despite a sharp drop in growth, according to Pantheon Macroeconomics, increasing difficulties for China’s export machine, orders Staying at home affects about a third of the country’s economic output, and the real estate sector remains supportive of life. And, while short-term borrowing costs in the nation’s interbank market have fallen since mid-April, long-term rates remain high: Five-year central government debt yields steady at 2 .6% as of the end of 2021.

Meanwhile, China’s central bank, rather than cut rates on its key one-year medium-term lending facility in response to the distressing April data, responded with a correction. modest adjustment to the basic guidance on mortgage rates.

All of this suggests one of two things: Top decision-makers have a very one-sided, and possibly unrealistic, view of their ability to ultimately control Omicron, or they simply simply concluded that given the public health necessity of the lockdown and the unpleasant reality of the Fed rate hike cycle, the current aggressive stimulus measures will do more harm than good. Turning the monetary engine around with much of the economy partially locked could, rather than help revive actual activity, simply blow asset bubbles or encourage more capital to flee the country.

General Secretary Xi Jinping probably doesn’t want a historically weak economy in the face of a possible bid for a precedent-breaking third term by the Communist Party of China this fall. But by one estimate, the wave of exiting Covid-19 is unchecked with the potential to be fatal, by one estimate, more than a million Chinese at current levels of vaccination coverage and healthcare capacity. Now, it will be even worse. Even assuming the outbreak in Shanghai is eventually brought under control sufficiently, cold weather later this year seems likely to create another set of problems.

Whether overconfidence or rigid realism is to blame for a quiet counter-cyclical, the outcome is likely to be the same: a long period of below-negative China growth, started with a sharp downturn this quarter. That is until Beijing finds its way out of the no-covid maze it has built for itself and weather the currency storm the Fed is causing across the Pacific.

It comes as little surprise that analysts – including Citibank and S&P Global – have been busy downgrading China’s full-year 2022 growth forecast in recent days to just above 4%. That could prove to be optimistic.

Despite the censorship, videos shared online show growing despair and anger at the prolonged Covid-19 shutdowns in China’s economic capital Shanghai, where officials is trying to tackle problems including food shortages while doubling down on the country’s strict pandemic policy. Photo Collection: Emily Siu

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https://www.wsj.com/articles/why-this-chinese-downturn-is-different-11652789876?mod=rss_markets_main Why This Chinese Downturn Is Different

Edmund DeMarche

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