China’s economy in Q1: Confidence wanes and liquidity wanes
Economic indicators at the end of the first quarter suggested China could not even achieve this modest growth due to extreme lockdowns in major business centers such as Shanghai and Shenzhen due to the Russian-Ukrainian war and a recent surge in COVID-19 cases.
China’s urban unemployment rate was 5.5 percent in February, up from 5.1 percent in December. The worsening job outlook is already evident; now, with wars and lockdowns, job losses are expected to rise.
Profits at private firms fell 1.7% in the first two months of the year, while profits at state-owned firms rose 16.7%. It was the growth of the private sector that lifted China out of poverty in the first place, and is now the hardest hit by government policy.
The economic slowdown is changing the geographic distribution of the population. Many migrant workers have not returned to big cities after the end of strict COVID-19 restrictions in 2020, a trend that will lead to lower industrial output in the future. The population of first-tier cities is declining or stagnant as people move to second- and third-tier cities to cut the cost of living.
According to the South China Morning Post, Beijing’s population fell by 4,000 last year, while the second-tier city of Chengdu grew by 245,000. In April last year, the Chinese state media Global Times predicted that Beijing’s population would decline again in 2022.
The number of investors pulling money out of China hit a record high. Since Russia’s invasion of Ukraine, Chinese stocks have seen outflows of up to nearly $500 million a day at one point. Foreign investors fretted over a slowing Chinese economy and close ties between Beijing and Moscow that could lead to a Biden administration imposing “secondary sanctions” on China.
Analysts expect significant volatility in yuan-denominated assets for the foreseeable future. In February, foreign investors slashed their holdings of Chinese government bonds to unprecedented levels, shedding $5.5 billion in Chinese sovereign debt. In addition to uncertainty over the future of China’s economy, the sell-off was fueled by speculation that Russia would liquidate its yuan assets to avoid sanctions.
A slowdown in China’s economic growth last year has already sent the country’s stock indexes lower, which have been battered so far this year.
The Shanghai Composite Index has been on a steady downward trend since 3677 on December 16 last year. Between March 11 and March 15, the index lost another 246 points to 3,064.
The Hang Seng Index (HIS) started the year at 23,397 but plummeted to 18,415 on March 15. The Hang Seng Technology Index fell from 5,670 on the last day of December to 3,472 on March 15.
The Shanghai and Shenzhen 300 Index (CSI300) reached 4,940 on December 31, but fell to 3,983 on March 15.
The economic slowdown – coupled with general uncertainty caused by the Russian-Ukrainian war, government crackdowns and ongoing lockdowns – has increased risk aversion among Chinese investors. New private investment funds were able to attract 44% less money in January than the previous month.
Fund investments, including stocks and bonds, fell 49%, private equity fell 25%, and venture capital fell 17%.
Mutual funds were hit hard, with new investments falling 61% in January from the previous month and 76% from a year earlier.
Financial firms canceled some new fund offerings, while subscription periods for others were extended. In addition, at least 16 public offerings (IPOs) have been delayed due to the closure of Shanghai.
This downward trend in investment funds suggests that people may no longer have the investable cash they had a year ago. People appearing to be apprehensive about the generally bleak economic outlook and holding their money in their hands rather than investing it could also mean a loss of confidence in the financial system. In either case, the result is that businesses struggle to find the capital they need to expand or start new businesses to create jobs.
Compared with 2021, sales by China’s largest property developer fell by 40% in the first quarter, while new home sales fell by 20% to 30%.
Nomura Holdings Inc. expects China’s economy to continue to slow and the real estate sector to decline further. As a result, Nomura believes that China may only achieve 4.3% growth this year. The war and ongoing lockdowns, especially in Shanghai, will prevent China from maintaining its first-quarter growth momentum for the rest of the year.
Bloomberg estimates that the closure of Shanghai alone could cut GDP growth by 4 percentage points. The COVID-19 lockdown is costing China an estimated $46 billion a month. Meanwhile, the regions most at risk of an outbreak account for 33% of GDP, and lockdowns in these regions would be incredibly damaging to China’s growth. Shanghai will offer $22 billion in tax breaks, including refunds, to companies affected by the lockdown, adding additional pressure to public debt.
China’s oil consumption has fallen, a clear sign that economic and industrial activity is slowing. According to Bloomberg, industry experts have cut China’s oil demand forecasts by 700,000 barrels per day in March, 600,000 barrels per day in April and 100,000 barrels per day in May and June.
China’s manufacturing purchasing managers’ index (PMI), which measures industrial output, fell to 49.5 in March from 50.2 in February. With the industrial sector accounting for about 33% of China’s GDP in 2021, a hit to this sector will affect the entire economy.
The non-manufacturing PMI, which is considered a measure of service sector output, fell to 48.4 in the past two months from 51.6. These numbers are important because the two numbers have not declined at the same time since February 2020, when much of China was under strict COVID-19 control. This means that China’s economy is shrinking at the fastest rate since the outbreak.
Natixis SA, a prominent French corporate and investment management firm, estimated that the lockdown slashed China’s growth rate by 1.8 percentage points in the first quarter, reducing its growth outlook for the year to 4 percent. Nomura Holdings expects China’s central bank to cut interest rates by 50 basis points to stimulate growth. Macquarie Capital Ltd. (Macquarie Capital Ltd.) forecasts China’s GDP growth of 5%, assuming that the lockdown may not last long and that interest rate cuts will compensate.
As Chinese President Xi Jinping seeks a third term, the economy could be a potential hole in his shirt. The social contract on which his regime is based is that the CCP provides citizens with a high degree of economic prosperity in exchange for the people handing over social control to the CCP.
Another factor that may lose legitimacy comes from the Chinese government’s claim that the CCP can control the epidemic. Last month, China experienced its highest number of COVID cases in two years, with tens of millions of people in Jilin, Shenzhen and Shanghai being quarantined at home.
The closure of Shanghai on March 28 is expected to restrict the movement and life of 26 million people in China’s financial hub. The question is whether the party and the people believe that Xi’s performance in the economy and the pandemic makes him an “indispensable core leader.”
With factories in Shenzhen closed and Shanghai’s financial sector constrained by COVID, the impact on the U.S. and the world will be more supply chain disruptions. Fewer foreign companies will invest in China and more companies will withdraw from China. To attract foreign investors, the Chinese government is easing investment restrictions and shortening the list of industries that foreigners cannot invest in.
China’s oil and gas demand will remain subdued until restrictions are lifted. That has dimmed Russia’s hopes of using increased energy sales to China to support its economy.
At the same time, with China’s economy struggling and Xi’s third term approaching, Xi is unlikely to risk incurring “secondary sanctions” from the United States to help Russia. It is also possible that he would delay the invasion of Taiwan to avoid sanctions and economic damage to China from a war with the United States.
About the Author:
Dr. Antonio Graceffo has worked and lived in Asia for over twenty years. He graduated from Shanghai Institute of Physical Education and obtained an MBA from Shanghai Jiaotong University. Antonio is an economics professor and China economic analyst who writes for various international media. Some of his Chinese books include Beyond the Belt and Road: China’s Global Economic Expansion and A Short Course on the Chinese Economy.
The original text: China’s First Quarter Economy: Less Confidence, Less Liquidity was published in The Epoch Times.
This article represents the views of the author and does not necessarily reflect the position of The Epoch Times.
Responsible editor: Ye Ziwei#