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The recent China inflation rate report signalled a negative impact of Covid-19 induced lockdowns on consumption, investments, and production. Shanghai has been shut off for over a month now, while other cities including Beijing have seen small scale outbreaks of Covid-19. However, China’s 2022 first-quarter gross domestic product (GDP) of 4.8% indicated that the economy had begun to rebound, and the best-case scenario shows a V-shape recovery starting in the late 2Q or early 3Q.
Official data from the National Bureau of Statistics showed that China’s annual inflation rate rose to 2.1% in April, up from 1.5% in March. Meanwhile, the producer price index increased 8% year-on-year in April compared to 8.3% in March. Although energy has a smaller share in China’s consumer basket, the rise in global oil prices has hit China markets as well.
China’s economy and zero-Covid policy
Tai Hui, Chief Asia Market Strategist, JP Morgan, in a statement said, “We believe a decline in new infection numbers would be the first step in improving market confidence. With part of the population in lockdown, fiscal and monetary stimulus may not be fully effective at this point. This perhaps explains why the measures implemented by both the central bank and the government to support the economy have fallen short of expectations so far. For example, the much-anticipated cut in Loan Prime Rate did not happen in April.”
The JP Morgan executive says that the Chinese authorities would not deviate from their zero- Covid approach. Beijing is determined to achieve its 5.5% growth target for 2022, but this would require a significant step up in policy support. President Xi Jinping also emphasized the need for infrastructure investment to support economic growth. That could provide some much-needed impetus to market sentiment, says Tai Hui.
As Covid-19 continues to ravage the economy, China has a lot of challenges to face as equities, both onshore and offshore, are trading below their 15-year average for both price-to-earnings and price-to-book ratio.
The country’s industrial output fell 2.9% in April compared to the previous year, retail sales were down 11.1%, while the unemployment rate climbed to 6.1% with the youth jobless rate hitting a record, recent data from the National Bureau of Statistics showed. Chinese markets have been seeing an exodus of foreign capital and an economic contraction may exacerbate the situation.
“The overview of the data paints a gloomy picture of the economy. Our GDP forecast of -1% YoY for the second quarter is confirmed by this activity data. The main reason is the long lockdown in Shanghai,” ING said in a statement.
UBS and Citigroup now expect full-year GDP growth of China to be at 4.2%, far from the official government target of 5.5%.
Government support amid a tumultuous time
Chinese Premier Li Keqiang in a statement said that the employment situation in China is “complex and grave.” He added that stabilizing employment is critical to people’s livelihood and is the key support for the economy to run within a reasonable range. Recent data released by the government showed that the jobless rate in the country has climbed to the highest in almost two years.
Premier Keqiang has instructed government authorities to prioritize measures in boosting jobs and maintaining stability. This includes helping small businesses survive, supporting the internet economy, providing incentives to encourage people to start their own businesses, and giving unemployment benefits to workers who have been laid off.
On the manufacturing front, China’s factory activity contracted in April, as widespread lockdowns curbed production and disrupted supply chains. Data released by China’s National Bureau of Statistics indicates a fall to 47.4 in April, down from 49.5 in March on a 100-point scale. Dead production lines of companies have also affected the logistics and the supply of raw materials and components.
Additionally, the service industry activity fell to 40, down from 46.7 in March, as sectors such as air transport and hospitality took a hit during the Covid outbreak.
Looking at China’s current scenario, the key to the short-term economic environment is the ending of widespread lockdowns. Andy Rothman, Investment Strategist at Matthew Asia said, “I expect the government to initiate a major stimulus program that is designed to support a visible economic recovery.” He previously had said that the easing cycle in China will result in building a stronger economic performance and improved sentiment among Chinese investors, who drive their domestic exchanges.
“Our concern is whether China will have lockdowns elsewhere, for instance in Bejing. The key question for us is how long future lockdowns will be. Any city that has to endure a 1-month lockdown will have its GDP in contraction on a yearly basis for that month. A 2-month lockdown may have a longer impact of more than 2 months as the jobless rate will increase, and people need time to find another job but at the same time firms are not ready to hire,” ING said in a report.
