Rethinking China’s Economic Future
The events of the past few months in China’s economy have been difficult to comprehend, even for experienced analysts. The years that are supposed to be politically “stable” in China—the Olympic year of 2008, the political transition of 2012, this year—always carry some turbulence, but 2022 represents a watershed in questioning long-held perceptions of China’s technocratic competence and capacity. We are seeing China’s leadership abandon long-term economic and political objectives for transitory, politically motivated gains against an indefatigable foe—the Omicron variant of COVID-19. More than the futility of the exercise, it is the inflexible commitment to sustaining the attempt, despite its dramatic consequences, that is generating a new wave of concerns about China’s economic future, and its position within the global economy. Financial markets have reacted accordingly, selling Chinese assets in large volumes, while corporates reassess the importance of China within their global strategies.To get more latest news on china's economy, you can visit shine news official website.
Today, even Premier Li Keqiang was forced to observe that economic “difficulties in some aspects and to a certain extent are greater” than in the epidemic’s first phase in 2020, while urging cadres to keep economic growth in positive territory in Q2. The recent data releases—both official and unofficial—unequivocally point to a contracting economy, possibly by larger margins than in Q1 2020, when GDP contracted by 10.3% q/q within the official data. Goldman Sachs just revised their own expectations of Q2 q/q growth to -7.5% annualized; UBS and JP Morgan made similar adjustments on Tuesday. It goes without saying that China’s 5.5% real GDP growth target this year is impossible to meet—in fact, we doubt we will hear Chinese officials mention the target for the remainder of the year. Our views on China’s growth rate in 2022 are clear—we are headed for very low growth this year, at the most 2% if there is a dramatic rebound in the second half, and a recession or economic contraction for the full year is becoming increasingly probable.
Freight and passenger traffic volumes nationwide have fallen by around 39 percent y/y in China in May as a result of lockdowns and COVID restrictions, based on Gaode data. Official industrial value-added fell by 2.9% in April, and will likely decline by similar margins in May. Property sales officially fell by 39% y/y in April, car sales declined by 47.6%, and excavator sales fell by 61%. Consumption is falling sharply as a result of COVID restrictions, with headline retail sales down 11.1% in April and even online sales from Alibaba’s Taobao and Tmall (undoubtedly hurt by delivery problems) are down 25.6% y/y. These are not small declines—they reflect a massive disruption to the regular operations of China’s economy, and they have continued in May from the declines in April.
Nor is there much evidence that policy support is starting to right the ship. China’s policy support has emphasized infrastructure construction, but this activity is being limited by lockdowns and restrictions just like other sectors. The evidence can be seen in continued drops in production for raw inputs: asphalt output has declined 33.6% so far this year, cement production fell by 18.9% in April, and capacity utilization rates for unsaturated polyester resin (UPR), a key polymer in building materials, are down 42% in April and 65% so far in May.
Yet despite this economic carnage, forecasts of China’s growth in 2022, and beyond, have barely adjusted. After the release of Q1 GDP data, which put growth at 4.8% (well above the consensus view of 4.4%), analysts counterintuitively rushed to downgrade their full-year forecasts. The current Bloomberg consensus forecast (Figure 1), even after the release of the April data pointing to an economic contraction and some of the recent downgrades already discussed, is for a 0.2% q/q growth rate in Q2, still in positive territory, and for 4.7% GDP growth for the full year. The forecast for y/y growth in Q2 is 3.3%, only a moderate slowdown from 4.8% growth in Q1.
There are some reasonable arguments why growth might only slow modestly, particularly if China abandons its COVID restrictions altogether and provides significant cuts in interest rates and stimulus to the property sector. But this path seems highly unlikely. Restrictions are more likely to lift gradually and in response to local government subterfuge rather than central government diktat. The property sector is going to remain a significant drag on investment growth this year, and recent zero COVID measures have added to the sector’s woes. It is difficult to understand what sector will actually grow at all this year, given the dramatic disruptions that zero COVID policies have created for the economy.
The direction of travel is clear, even if the magnitude of adjustment is not. Companies, investors, and governments should be thinking about far slower Chinese economic growth, both in 2022 and in the future. Consensus expectations have not yet adjusted meaningfully—in part because of China’s excessively rosy economic data—but they will.
We described all of the pressures created by Beijing’s political reliance upon high and stable GDP growth rates in our 2019 note, “China’s GDP: The Costs of Omerta”. The code of silence among most sell-side institutions and global policymakers regarding the quality of China’s GDP data has consistently created false assumptions about China’s growth and the potential for policy mistakes in response to mistaken economic signals. The costs of refusing to engage with economic reality are rising because even onshore market analysts are reluctant to publish any bad news or negative forecasts. The key point is that consensus expectations as we are now seeing them—0.2% q/q growth in Q2, 4.7% full-year growth (according to Bloomberg’s survey)—are still wildly unrealistic, a fact that is acknowledged but unstated publicly by most forecasters. And when those expectations adjust, the scale of the downgrades to China’s expected growth could be large.
The reality of China’s economic distress has been clearly revealed in onshore and offshore equity markets, which have fallen to the lowest levels since the start of the pandemic. Naturally, this has generated considerable risk aversion within China’s financial markets. But actually talking about the woes of the equity market and the state of the economy has caused several mainland investors and commentators to seemingly have their social media access restricted in response, and some may have actually lost their jobs. In this climate, we should not expect significant downgrades of growth expectations from any analyst servicing mainland clients.
Even sell-side firms have been cautious. There is always pressure to remain within consensus, and an awareness that consensus on Chinese growth will remain heavily dependent upon Beijing’s official GDP growth target, unrealistic as it may be. Hence, even those that are downgrading Q2 GDP growth aggressively are seemingly cautious about how that will implicate full-year 2022 GDP growth rates, which may explain the more limited adjustments to full-year forecasts. If one assumes Beijing will continue to publish stable growth rates regardless of how the real economy performs, it makes little sense to go out on a limb with a sharp downgrade of GDP growth forecasts. |
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