China’s Covid zero and housing slump drag on growth engines

Published on Nov 14, 2022 06:08 AM IST

The government’s concern about the real-estate market is clear from the sweeping rescue package to bail it out from the record slowdown and deepening liquidity crunch.

The latest wave of Covid outbreaks in China escalated rapidly in October, with daily case numbers hovering at the highest level in months despite lockdowns and constant mass testings. (Bloomberg)
The latest wave of Covid outbreaks in China escalated rapidly in October, with daily case numbers hovering at the highest level in months despite lockdowns and constant mass testings. (Bloomberg)
Bloomberg |

China’s growth momentum likely lost steam in October with worsening Covid outbreaks and the housing slump weighing on business activities, and more economic pain is likely ahead if Beijing can’t act effectively to turn the downturn around.

Key data due Tuesday -- from industrial output and investment to retail sales and the unemployment rate -- will likely show the world’s second-largest economy slowed across the board last month, following a short-lived uptick in September. The figures will shed light on the extent of problems facing Beijing as it tries to support an economy struggling due to the Covid Zero strategy and other challenges such as waning global demand and a meltdown in the housing market.

The government’s concern about the real-estate market is clear from the sweeping rescue package to bail it out from the record slowdown and deepening liquidity crunch, which Bloomberg News reported over the weekend. The 16-point plan was communicated to financial institutions last week, according to people familiar with the matter, and will extend loan deadlines and provide other assistance.

The latest wave of Covid outbreaks in China escalated rapidly in October, with daily case numbers hovering at the highest level in months despite lockdowns and constant mass testings. Two-thirds of the country’s 31 provinces were affected and cities with high and mid-risk districts accounted for 47% of the nation’s gross domestic product at the end of October, according to a report from Goldman Sachs Group Inc.

Rising cases and China’s re-affirmed commitment to the Covid Zero approach means the economy will likely continue to struggle in coming months, even with some limited easing of restrictions. China’s exit from the Covid pandemic could take at least a year, with reopening only starting sometime from April and a slow return to normality likely weighing on investors’ hopes for a quick economic recovery, according to a recent survey of analysts.

Consumption Slows

Consumption was likely hit the hardest, as tightened Covid controls around the Communist Party congress in mid-October discouraged travel, curbed spending on eating out and at cinemas, and reduced people’s appetite for discretionary purchases. Spending during the week-long national day holiday at the start of the month was worse than during the same period in 2021 and was nowhere near the pre-pandemic levels. Car purchases, one of the few bright spots in the retail market, seem to be weakening as well, with the year-on-year growth in vehicle sales slowing sharply.

Economists expect October’s consumption growth to drop to the weakest pace since the height of the Shanghai lockdown in the second quarter. Retail sales likely expanded by just 0.7%, down from a 2.5% expansion in September, according to the median forecast of economists in a Bloomberg survey.

The unexpected drop in imports last month also underscored China’s faltering domestic demand. The value of goods China bought from overseas declined 0.7% on year, the first fall since August 2020. The weakness can also be seen in the nation’s subdued core consumer price index, which was lowest among major economies.

Credit growth in October, meanwhile, was the lowest since 2019 and bank loans expanded by the smallest amount in almost five years as demand suffered.

Production

Virus flareups in some of the country’s main manufacturing areas likely disrupted supply chains and logistics, while weaker demand at home and abroad probably capped production at factories as well.

An outbreak at Foxconn Technology Group’s main factory in the central city of Zhengzhou and the ensuing lockdown drove hundreds of workers to flee on foot. Rapidly climbing cases in Guangdong province, China’s biggest regional economy and an important manufacturing hub, eventually triggered partial lockdowns and suspension of activities such as schools. The capital city of Beijing also tightened restrictions recently in response to an increasing number of infections.

External demand, which kept Chinese manufacturers busy over the past two years, looks to be waning as well. Exports in October contracted for first time since May 2020 and that will likely continue. Shipments will decline 5% next year after rising 10% in 2022 and 30% in 2021, according to Larry Hu, head of China economics at Macquarie Group Ltd.

Both the official and private gauges of China’s manufacturing industry pointed to a contraction in activity last month, with production and new orders worsening from a month earlier, while factory-gate deflation may further hurt producers’ profits. Economists estimate that the value added of industrial output grew at a slower pace of 5.2% in October, compared to an increase of 6.3% in September.

Investment

Investment in October would again be a race between the push for more infrastructure and property woes pulling down activity. Fixed-asset investment likely increased 5.9% in the first 10 months of the year, the same pace registered in September, according to the Bloomberg survey.

Efforts to sell local government special bonds that are mainly earmarked for infrastructure projects should continue to provide some support. Central bank Governor Yi Gang said in a speech this month that the effects of the enhanced support to infrastructure investment would show up in fourth-quarter data, although the world’s largest steel maker last month offered a bleak outlook for demand for the metal, which is essential for building.

The decline in property investment, however, likely continued to get worse, despite government efforts to stabilize the sector. The slump in home sales intensified last month, a sign that a recovery in the nation’s property market remains distant.

Employment

The jobless rate is expected to remain elevated, as the economy cools down and Covid controls continue to force businesses to shut. The surveyed jobless rate is seen staying unchanged at 5.5%, a level around which the government aims to keep the full year rate.

However, other data indicates the labor market worsened in October, with the employment sub-index for China’s non-manufacturing purchasing manager’s index, which tracks hiring intentions in the service and construction sector, deteriorating to a five-month low in October. The gauge for the manufacturing sector also worsened.

The youth unemployment rate will be closely studied for signs of any improvement or deterioration in the labor market. It has stayed at a level more than three times the overall jobless rate, highlighting the pain masked by the relatively rosy headline jobless number.

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