China is locking down massive portions of its economy and population when COVID case #s are minuscule by western standards. Why is this? Hard to look behind the curtin, but perhaps China isn't confident their vaccine technology is sufficiently advanced to keep the pandemic within reasonable parameters?
Why This Chinese Downturn Is Different
Growth is plummeting, but policy makers are largely standing pat—a reflection of how much China’s zero-Covid policy and the Fed rate-raising cycle tie officials’ hands
By Nathaniel Taplin, WSJ
May 17, 2022 8:17 am ET
China’s largest city has spent most of the past two months in a state of suspended animation. It is no surprise that the economy has been hit hard. What is surprising is the lack of a clear, credible plan to turn things around—other than more of the same.
China’s major April economic figures, released Monday, were sobering enough. Retail sales fell by 11.1% year over year—nearly as sharply as in March 2020 during the initial post-outbreak lockdown that essentially shut China down in the early spring. Investment and industrial growth also weakened, though less dramatically, with the latter falling 2.9%, compared with 5% growth in March.
But what really should make investors sit up and pay attention is how muted the official response to all this has been. While there has been plenty of discussion of the need to shore up the economy at the top echelons of government, the reality is that, so far, the actual policy response has been extremely underwhelming.
The credit and rate environment in China right now speaks volumes. Growth in the broadest measure of Chinese economywide credit outstanding—so-called aggregate finance to the real economy—dropped back to an anemic 10.2% year-over-year growth in April, leaving the trend essentially flat since late 2021. That was despite a steep drop in growth, rising headwinds for China’s export machine, stay-at-home orders affecting around one third of the nation’s economic output according to Pantheon Macroeconomics and a real-estate sector that remains on life support. And, while short-term borrowing costs in the nation’s interbank market have fallen since mid-April, longer-term rates have remained stubbornly high: Yields on five-year central government debt have been steady around 2.6% since late 2021.
Meanwhile, China’s central bank, rather than cutting the rate on its key one-year, medium-term lending facility in response to April’s distressing data, has responded with a modest tweak downward to its window guidance on mortgage rates.
All of this suggests one of two things: Either top decision makers have a very rosy, and probably unrealistic, view of their ability to ultimately control Omicron, or they have simply concluded that given the public-health necessity of lockdowns and the uncomfortable reality of a Fed rate-rasing cycle, aggressive stimulus now would do more harm than good. Revving the monetary engine with much of the economy in partial lockdown might, rather than helping revive real activity, simply blow asset bubbles or encourage more capital to flee the country.
General Secretary Xi Jinping presumably doesn’t want a historically weak economy ahead of his probable bid for a precedent-breaking third term atop the Chinese Communist Party this fall. But an uncontrolled Covid-19 exit wave with the potential to kill, according to one estimate, over a million Chinese at current levels of vaccination coverage and healthcare capacity, would be worse. Even assuming Shanghai’s outbreak is ultimately brought under sufficient control, cold weather later this year seems likely to create another round of problems.
Whether overconfidence or hardheaded realism are responsible for the tepid countercyclical response, the likely result is the same: an extended period of subpar Chinese growth, beginning with a steep downturn this quarter. That is until Beijing finds a way out of the zero-covid labyrinth it has built for itself and weathered the monetary storm the Fed is brewing across the Pacific.
Little wonder that analysts—including at Citibank and S&P Global—have been busy downgrading full-year 2022 Chinese growth forecasts in recent days to just above 4%. That might yet prove optimistic.