China’s Surprise Growth Burst Likely Short-Lived as Covid Spikes

China’s economy had a stronger-than-expected start to the year but the outlook remains grim as the nation battles its worst Covid outbreak since Wuhan two years ago and Russia’s invasion of Ukraine throws global financial markets and energy prices into turmoil.

Consumer spending on shopping and eating-out and investment by state-owned companies grew strongly in the first two months of the year, official data showed Tuesday. That was before the country began recording large-scale omicron virus outbreaks and locking down major cities like Changchun and Shenzhen. Industrial production of products such as cars surged but a slump in the housing market persisted.

Beijing has set an ambitious economic growth target of about 5.5% for the year, suggesting it could help stabilize a global economy reeling from Russia’s Ukraine invasion. But economists are doubtful of that goal, with tighter virus controls in places like Guangdong and Shanghai disrupting manufacturing, an ongoing contraction in the country’s huge property market showing no signs of easing and an oil price hike pushing up business and consumer costs.

“There’s certainly big downside risks in March as the government is likely to have prioritized Covid control before economic growth,” said Larry Hu, an economist at Macquarie Capital Ltd. “More policy support will be needed.”

The strong January-February data likely caused the People’s Bank of China to hold off on cutting interest rates, confounding the expectations of the majority of economists in a Bloomberg survey who had expected a 10 basis-point reduction in the one-year policy loan rate. The PBOC did inject a net 100 billion yuan ($15.7 billion) of funds into the financial system.

Chinese markets have been whipsawed in recent days, with stocks in Hong Kong and China plunging amid concerns over the country’s ties with Russia and persistent regulatory pressure. The benchmark CSI 300 Index pared losses after the data was released Tuesday morning, before falling again in afternoon trading to drop as much as 3.4%.

Mitul Kotecha, chief emerging Asia and Europe strategist at TD Securities, said the PBOC’s response Tuesday was a “pause rather than any shift in policy stance.” He still expects a cut in the loan prime rate, the de facto lending rate in the economy, and the reserve requirement ratio for banks in the weeks ahead.

Industrial output grew 7.5% in the two months through February, figures from the National Bureau of Statistics showed, while retail sales rose 6.7%, accelerating from 1.7% in December. Investment climbed 12.2% during the two-month period.

The surveyed jobless rate rose to 5.5% last month, mainly due to seasonal factors.

What Bloomberg Economics Says…

“The Chinese economy made a surprisingly strong start to the year — momentum that it will need to contend with a mounting range of threats to growth.”

“The government’s policy support is kicking in — and probably boosting sentiment. But with increasing downside risks, the government and central bank will have to step up support further.”

Chang Shu and Eric Zhu

While the economy had “good recovery momentum” in the two months, the “external environment still remains complex and grim, and there are many risks and challenges,” NBS spokesman Fu Linghui said in a statement.

China reported more than 5,000 new coronavirus infections for Monday. The lockdowns and restrictions to contain that spread are a substantial threat to the economy’s outlook and could push global inflation higher if factory or port closures become widespread and persistent. Key Apple Inc. supplier Hon Hai Precision Industry Co. said it was halting production at its sites in Shenzhen, while Toyota Motor Corp. has stopped its plant in Changchun city.

Goldman Sachs Group Inc warned last week that higher oil prices could subtract half a percentage point from China’s growth. Australia & New Zealand Banking Group Ltd. estimates about half of China’s gross domestic product would be affected if lockdowns become more widespread, and could subtract 0.8 percentage point from the GDP growth rate.

“The government has no choice but to focus on containing the outbreaks with restrictive policies and tolerate economic costs in the short term,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management. “I expect the government will likely roll out further macro polices to boost growth, including rate cuts and fiscal spending.” Still, the measures will act with a lag and the “economy will likely get worse before it gets better,” he added.

The data showed ongoing weakness in the property market, with residential property sales contracting more than 22% in the first two months of the year from the same period in 2021. Data released last week showed a slump in bank lending in February, with a key indicator of home mortgages declining for the first time in at least 15 years despite efforts to boost borrowing by cutting rates and lowering down payments for housing. The area of new housing projects started by developers fell sharply.

The PBOC is likely to further loosen monetary policy to push China’s year-on-year GDP growth above 5%, said Helen Qiao chief Greater China economist at Bank of America Global Research.

“But to go to 5.5%, we believe more measures, especially on the property side, need to be introduced to support the current demand,” she added.

Source: Yahoo

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