- Retail sales, industrial output forecast to drop again
- PBOC expected to keep key interest rate unchanged this week
Bloomberg News
June 14, 2022
China’s economy is teetering on the brink of a contraction this quarter, with key data for May likely to show little improvement from the previous month as Covid restrictions, a housing slump and weak demand continue to hammer growth.
After April’s collapse in activity, data on Wednesday will likely show retail sales declined more than 7% in May from a year earlier, while industrial output dropped 0.9%, according to the median forecasts in a Bloomberg survey of economists.
The last time China recorded two months of contraction in a row for that data was early in 2020, when Wuhan locked down to contain the initial Covid outbreak. GDP contracted in the first quarter of that year.
While the median forecast is still for the economy to expand this quarter — at just 0.2% — economists don’t expect the recovery to be as rapid as it was in 2020 given the uncertainty about virus controls. China’s tools to contain the latest virus outbreaks are proving less effective against more transmissible variants, prompting cities like Shanghai and Beijing to bring back curbs when infections rebound.
This stop-start reopening isn’t just affecting immediate consumption. It’s also weighing on sentiment, making consumers less willing to spend on major purchases like homes or invest their money long term if there’s a chance they could be locked down at any time and potentially lose months of income.
“The main deficiency in China‘s economy right now is a lack of demand linked to falling wealth and income,” Craig Botham, chief China economist at Pantheon Macroeconomics, wrote in a report. “No matter how cheap credit gets, many will want to pay down existing debt, not take on more.”
Here’s a look at what the latest indicators tell us about May’s economic data:
Truck Flows
Factories are now resuming production, but a full recovery will take time. Real-time data on truck flows in Shanghai and for the country show activity is not even back at the level before the lockdown, let alone rapidly expanding.
In the week through Sunday, truck flows in Shanghai rose to 53% of the average level in 2019, according to data from G7 Connect. That’s the highest since the last week of March, but still well below normal.
The automotive and farming hub Jilin, meanwhile, is struggling with its own lengthy and slow recovery, with truck activity still not back to normal almost two months after the province started coming out of lockdown. Without a strong rebound in June, China’s economy will likely contract this quarter — something Premier Li Keqiang has been urging local governments to try and avoid.
Housing Slump
Property sales by the top 100 developers dropped 59% in May from a year earlier, the fastest rate of decline over the past 11 months of falls.
That has flowed through to construction demand and purchases of equipment. Chinese buyers bought 45% fewer excavators in May than the same month a year earlier. Heavy equipment from Japan’s Komatsu Ltd in China was used for 17% fewer hours in May, the third straight month that usage has fallen.
The property fallout has also hit demand for mortgages, with new medium- and long-term loans to households falling in February and April. Even with a slight recovery in May to 105 billion yuan ($15.6 billion), it was still the fourth-worst month in the past decade. The clear reluctance of people to borrow money to buy homes means housing demand will likely continue to be weak going forward.
Bank Lending
Despite interest rate cuts this year and calls to banks to increase lending, loan demand remains weak. According to May data, banks were lending to each other at near-zero rates to make up for the lack of real borrowers. And instead of spending, people are rapidly adding to their savings, which grew by 7.86 trillion yuan ($1.2 trillion) in the first five months of the year, the most for the period since data began in 2005, according to figures released by the People’s Bank of China.
The central bank will have an opportunity to cut a key policy interest rate Wednesday morning just before the May economic data is released. Fourteen of the 19 economists surveyed by Bloomberg predict the bank will keep the rate on a one-year loan to banks unchanged at 2.85%, while the rest forecast a reduction of either five or 10 basis points.
Infrastructure Funding
Local governments are under severe financial strain because of the economic downturn and tax cuts, making it difficult for them to ramp up spending on infrastructure needed to spur growth.
Shanghai’s general fiscal revenue fell 48% in April from a year earlier, according to Bloomberg calculations based on government data. Revenue dropped 44% in Shenzhen and 41% nationally, at the same time as the cost of things like permanent mass Covid testing increased.
Local governments are expected to sell a record amount of bonds this week to help finance their spending. Analysts expect the central bank to roll over the 200 billion yuan in one-year loans which mature this week, according to the Bloomberg survey. Banks will need that cash to buy up an the expected surge in government bond issuance.
Export Pressure
One bright spot for the economy is the continued strength of exports, which rose almost 17% in May, stronger than April and better than economists had expected. While those figures — along with earlier export data from South Korea — show demand remained solid in May, exporters are reporting a drop in orders as consumers around the world start shifting their spending from goods to services, darkening the outlook for China’s companies.
Commodities output probably improved in May as the government tentatively eased some of its virus restrictions. Wednesday’s data is likely to show aluminum as a standout, and steel output probably also ticked higher as mills responded to President Xi Jinping’s call for an all-out push on infrastructure spending to bolster economic growth.
— With assistance by James Mayger, Yujing Liu, Jason Rogers, Tom Hancock, Wenjin Lv, and Tomoko Sato