China Economy: Darkness before the Dawn?
SITUATION REPORTS - January 3, 2023
By Geopolitical Monitor
As China shifts to a “dynamic let it rip” policy (all credit to Bill Bishop for the term), the country faces not just a health crisis but an economic one as well.
On the health front, national case loads remain a guessing game in the absence of reliable official statistics and the abandonment of systemic testing. In terms of official estimates, Chinese officials believe approximately 250 million people (18% of the population) were infected with COVID-19 over the first 20 days of December. Yet in a reflection of the ongoing unreliability of China’s official data, the National Health Commission has reported just eight deaths from December 1-24. Elsewhere, outside experts have estimated as many as 9,000 people dying a day. And with hospitals swamped throughout the country, the wave is doubtlessly producing indirect morbidities as regular patient care is disrupted, as seen elsewhere in the world throughout the course of the pandemic.
The abandonment of China’s longstanding zero-Covid policy is resonating in the economic realm as people stay home and defer spending to avoid getting sick, and this is serving to compound pre-existing economic malaise from the lockdown-heavy zero-Covid era.
The truth of this is borne out by recent economic data. For example, China’s official purchasing managers’ index (PMI) for manufacturing dropped to 47 in December, down from 48 the month before. The dip was both under the consensus estimate of 48 and large enough to represent the biggest decline since the pandemic’s initial phase in 2020. The Caixin index (which focuses on smaller, export-oriented firms), also fell to 49 in December from 49.4 the month before.
Services have been hit even harder than manufacturing as people shy away from leisure activities such as travel and eating out. The official services PMI dropped to 39.4 in December, down from 45.1 in November; again, this is the lowest reading since the pandemic’s initial phase in February 2020, and the fourth consecutive month of declines. The Caixin services numbers are expected on January 5, but they are unlikely to buck the trend of a serious decline in consumer activity.
The non-manufacturing index (which includes the services PMI as a sub-index) also recorded a hefty decline, hitting 41.6 in December after a 46.7 reading in November. The gauge is important because it includes construction activity, which is of course linked to the country’s flailing real estate market – a sector that has been flashing warning signals for years. The latest data continues this trend: Hong Kong home sales have fallen 40% year-on-year, hitting their lowest level since the Great Recession; new home prices in an index of 70 cities dropped 0.25% month-on-month in November, marking the 15th consecutive month of declines; and attempts at policy supports have yet to have any sizable effect (with more on the way, suggesting ongoing concerns on the part of the authorities).
Steel and iron prices provide another window into the extent of China’s construction woes. Despite nearly $90 billion in infrastructure spending commitments since June 2022, iron and steel prices have not rebounded as strongly as in the past; moreover, Chinese steel markets are expected to be heavily oversupplied through 2023, with new home construction – a primary market mover – remaining flat throughout the year.
The future of Chinese property markets will ultimately come down to buyer confidence. It’s no mystery why demand has been soft amid the lockdowns of zero-Covid and, perhaps more importantly, the paradigm shift of the ‘three red lines’ policy, which effectively bookmarked the era of endless price growth. The property market is no longer a no-brainer for Chinese families which for a generation have only experienced gains on their real estate investments.
It is this matter of consumer confidence that will determine China’s economic fate over the second half of 2023. Although it’s obvious to anyone that the Chinese economy is navigating rough waters amid a massive surge of COVID-19 cases over the next few months, analysts are banking on economic recovery and boom over the second half of 2023. The logic is two-fold: 1) consumers have pent up demand that has gone unrealized under zero-Covid and the present surge; and 2) this is the same dynamic that unfolded across the developed world, albeit earlier than China, which opted to maintain strict COVID-19 controls while other governments let the virus to circulate.
Yet there are a few reasons why China’s economic recovery may fall well short of other cases like the United States. For one, China’s export-oriented economy will be looking to ramp up amid a very different economic context as its major export markets veer toward recession. Recession calls are proliferating; for example, the IMF predicting that the year will see over a third of the world in recession, including major economies such as the United States and EU. Other forecasts are even more grim: Barclays Capital Inc. is betting on a severe global downturn, with 2023 being one of the worst years for the global economy in four decades. The Chinese economy of course could mitigate the damage by focusing on its domestic market – hence the ‘dual’ part of Xi Jinping’s dual circulation – but hopes for a shift toward consumption-fueled growth have been dashed in the past due to China’s gun-shy and saving-inclined middle class. Finally, Chinese consumers haven’t received the kind of direct government payments seen elsewhere during the pandemic, which both insulated populations from the economic blowback of lockdowns and boosted their buying power during post-COVID economic booms.
On the health front, national case loads remain a guessing game in the absence of reliable official statistics and the abandonment of systemic testing. In terms of official estimates, Chinese officials believe approximately 250 million people (18% of the population) were infected with COVID-19 over the first 20 days of December. Yet in a reflection of the ongoing unreliability of China’s official data, the National Health Commission has reported just eight deaths from December 1-24. Elsewhere, outside experts have estimated as many as 9,000 people dying a day. And with hospitals swamped throughout the country, the wave is doubtlessly producing indirect morbidities as regular patient care is disrupted, as seen elsewhere in the world throughout the course of the pandemic.
The abandonment of China’s longstanding zero-Covid policy is resonating in the economic realm as people stay home and defer spending to avoid getting sick, and this is serving to compound pre-existing economic malaise from the lockdown-heavy zero-Covid era.
The truth of this is borne out by recent economic data. For example, China’s official purchasing managers’ index (PMI) for manufacturing dropped to 47 in December, down from 48 the month before. The dip was both under the consensus estimate of 48 and large enough to represent the biggest decline since the pandemic’s initial phase in 2020. The Caixin index (which focuses on smaller, export-oriented firms), also fell to 49 in December from 49.4 the month before.
Services have been hit even harder than manufacturing as people shy away from leisure activities such as travel and eating out. The official services PMI dropped to 39.4 in December, down from 45.1 in November; again, this is the lowest reading since the pandemic’s initial phase in February 2020, and the fourth consecutive month of declines. The Caixin services numbers are expected on January 5, but they are unlikely to buck the trend of a serious decline in consumer activity.
The non-manufacturing index (which includes the services PMI as a sub-index) also recorded a hefty decline, hitting 41.6 in December after a 46.7 reading in November. The gauge is important because it includes construction activity, which is of course linked to the country’s flailing real estate market – a sector that has been flashing warning signals for years. The latest data continues this trend: Hong Kong home sales have fallen 40% year-on-year, hitting their lowest level since the Great Recession; new home prices in an index of 70 cities dropped 0.25% month-on-month in November, marking the 15th consecutive month of declines; and attempts at policy supports have yet to have any sizable effect (with more on the way, suggesting ongoing concerns on the part of the authorities).
Steel and iron prices provide another window into the extent of China’s construction woes. Despite nearly $90 billion in infrastructure spending commitments since June 2022, iron and steel prices have not rebounded as strongly as in the past; moreover, Chinese steel markets are expected to be heavily oversupplied through 2023, with new home construction – a primary market mover – remaining flat throughout the year.
The future of Chinese property markets will ultimately come down to buyer confidence. It’s no mystery why demand has been soft amid the lockdowns of zero-Covid and, perhaps more importantly, the paradigm shift of the ‘three red lines’ policy, which effectively bookmarked the era of endless price growth. The property market is no longer a no-brainer for Chinese families which for a generation have only experienced gains on their real estate investments.
It is this matter of consumer confidence that will determine China’s economic fate over the second half of 2023. Although it’s obvious to anyone that the Chinese economy is navigating rough waters amid a massive surge of COVID-19 cases over the next few months, analysts are banking on economic recovery and boom over the second half of 2023. The logic is two-fold: 1) consumers have pent up demand that has gone unrealized under zero-Covid and the present surge; and 2) this is the same dynamic that unfolded across the developed world, albeit earlier than China, which opted to maintain strict COVID-19 controls while other governments let the virus to circulate.
Yet there are a few reasons why China’s economic recovery may fall well short of other cases like the United States. For one, China’s export-oriented economy will be looking to ramp up amid a very different economic context as its major export markets veer toward recession. Recession calls are proliferating; for example, the IMF predicting that the year will see over a third of the world in recession, including major economies such as the United States and EU. Other forecasts are even more grim: Barclays Capital Inc. is betting on a severe global downturn, with 2023 being one of the worst years for the global economy in four decades. The Chinese economy of course could mitigate the damage by focusing on its domestic market – hence the ‘dual’ part of Xi Jinping’s dual circulation – but hopes for a shift toward consumption-fueled growth have been dashed in the past due to China’s gun-shy and saving-inclined middle class. Finally, Chinese consumers haven’t received the kind of direct government payments seen elsewhere during the pandemic, which both insulated populations from the economic blowback of lockdowns and boosted their buying power during post-COVID economic booms.
Republished for educational purpose with permission from Geopolitical Monitor.
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