China’s First Quarter Economy: Less Confidence, Less Liquidity

News AnalysisThis year, Beijing set the lowest GDP growth target in decades at 5.5 percent. At the close of the first quarter, economic indicators suggest that China will not achieve even this modest growth due to the Russia-Ukraine war and extreme lockdowns of major commercial centers—such as Shanghai and Shenzhen—over a recent surge in COVID-19 outbreaks. China’s urban unemployment was 5.5 percent in February, up from 5.1 percent in December. There was already a clear trend of worsening job prospects; now, with the war and the lockdowns, the jobless numbers are expected to increase. Private sector firms saw a 1.7 percent fall in profits in the first two months of the year, while state-owned enterprises experienced an increase in profits of 16.7 percent. It was the growth of the private sector that initially lifted China out of poverty. Now, the private sector is being hit hardest by government policies. The economic slowdown is altering the geographic distribution of the population. After the end of the severe COVID restrictions in 2020, many migrant workers failed to return to the big cities, a trend that will result in lower industrial output in the future. The population of tier-one cities is declining or stagnating as people relocate to tier-two and tier-three cities to cut living costs. The South China Morning Post reported that Beijing’s population decreased by 4,000 last year while Chengdu, a second-tier city, added 245,000 residents. Last April, the Chinese state-run Global Times predicted that the population of Beijing would drop again in 2022. Investors have been pulling their money out of China in record numbers. At one point, Chinese stocks saw outflows of as much as nearly $500 million per day since the Russian invasion of Ukraine. Foreign investors are put off by China’s slowing economy and Beijing’s close ties to Moscow, which could result in secondary sanctions from the Biden administration. Analysts expect that yuan-denominated assets will be highly volatile in the foreseeable future. In February, foreign investors reduced their holdings of Chinese government bonds to unprecedented levels, shedding $5.5 billion of China’s sovereign debt. Aside from uncertainties about the future of the Chinese economy, the sell-off was also sparked by speculation that Russia would be liquidating its yuan holdings to bypass sanctions. A slowing economy last year already had China’s stock indices in retreat. So far this year, the indices have been taking a beating. The Shanghai Composite Stock Market Index has been trending steadily downward since Dec. 16, when it stood at 3,677. It took a huge dip, falling an additional 246 points between March 11 and March 15, reaching a bottom of 3,064. The Hang Seng Index (HIS) began the year at 23,397 but plummeted on March 15 to 18,415. The Hang Seng TECH Index fell from 5,670 on the last day of December to 3,472 on March 15. The CSI 300 Index (CSI300) stood at 4,940 on Dec. 31 but dove to 3,983 on March 15. A mobile phone shows the Shanghai Composite Index falling below 3,200 points during intraday trading in Yichang, Hubei Province, China, on March 9, 2022. (Costfoto/Future Publishing via Getty Images) A slowing economy—combined with general uncertainty caused by the Russia-Ukraine war, government crackdowns, and persistent lockdowns—has increased the risk aversion of Chinese investors. The amount of money that newly-launched private investment funds were able to attract decreased by 44 percent in January from the previous month. Investment in funds comprised of stocks and bonds dropped by 49 percent, while private equity decreased by 25 percent and venture capital by 17 percent. Mutual funds were hit very hard, with new investment diminishing by 61 percent in January from a month earlier and 76 percent from a year prior. Financial companies have canceled the launch of some of their new funds, while the subscription periods for other funds have been extended. Additionally, at least 16 IPOs have been delayed due to the Shanghai lockdown. This downward trend in investment funds suggests that people may not have the investable cash they had a year ago. It seems that people are fearful of the generally bleak economic outlook and are holding onto their money rather than investing it. It could also represent a loss of confidence in the financial system. Either way, the result is that firms will have trouble finding the cash necessary to create jobs by expanding or launching new ventures. During the first quarter, China’s largest real estate developers saw a decline of 40 percent, while new home sales were down between 20 percent and 30 percent compared to 2021. Nomura Holdings Inc. expects the Chinese economy to continue to slow while the property sector will decline further. Consequently, it believes China may only achieve 4.3 percent growth this year. Nomura believes that the war and continued lockdowns, particularly in Shanghai, will prevent China f

China’s First Quarter Economy: Less Confidence, Less Liquidity

News Analysis

This year, Beijing set the lowest GDP growth target in decades at 5.5 percent.

At the close of the first quarter, economic indicators suggest that China will not achieve even this modest growth due to the Russia-Ukraine war and extreme lockdowns of major commercial centers—such as Shanghai and Shenzhen—over a recent surge in COVID-19 outbreaks.

China’s urban unemployment was 5.5 percent in February, up from 5.1 percent in December. There was already a clear trend of worsening job prospects; now, with the war and the lockdowns, the jobless numbers are expected to increase.

Private sector firms saw a 1.7 percent fall in profits in the first two months of the year, while state-owned enterprises experienced an increase in profits of 16.7 percent. It was the growth of the private sector that initially lifted China out of poverty. Now, the private sector is being hit hardest by government policies.

The economic slowdown is altering the geographic distribution of the population. After the end of the severe COVID restrictions in 2020, many migrant workers failed to return to the big cities, a trend that will result in lower industrial output in the future. The population of tier-one cities is declining or stagnating as people relocate to tier-two and tier-three cities to cut living costs.

The South China Morning Post reported that Beijing’s population decreased by 4,000 last year while Chengdu, a second-tier city, added 245,000 residents. Last April, the Chinese state-run Global Times predicted that the population of Beijing would drop again in 2022.

Investors have been pulling their money out of China in record numbers. At one point, Chinese stocks saw outflows of as much as nearly $500 million per day since the Russian invasion of Ukraine. Foreign investors are put off by China’s slowing economy and Beijing’s close ties to Moscow, which could result in secondary sanctions from the Biden administration.

Analysts expect that yuan-denominated assets will be highly volatile in the foreseeable future. In February, foreign investors reduced their holdings of Chinese government bonds to unprecedented levels, shedding $5.5 billion of China’s sovereign debt. Aside from uncertainties about the future of the Chinese economy, the sell-off was also sparked by speculation that Russia would be liquidating its yuan holdings to bypass sanctions.

A slowing economy last year already had China’s stock indices in retreat. So far this year, the indices have been taking a beating.

The Shanghai Composite Stock Market Index has been trending steadily downward since Dec. 16, when it stood at 3,677. It took a huge dip, falling an additional 246 points between March 11 and March 15, reaching a bottom of 3,064.

The Hang Seng Index (HIS) began the year at 23,397 but plummeted on March 15 to 18,415. The Hang Seng TECH Index fell from 5,670 on the last day of December to 3,472 on March 15.

The CSI 300 Index (CSI300) stood at 4,940 on Dec. 31 but dove to 3,983 on March 15.

Epoch Times Photo
A mobile phone shows the Shanghai Composite Index falling below 3,200 points during intraday trading in Yichang, Hubei Province, China, on March 9, 2022. (Costfoto/Future Publishing via Getty Images)

A slowing economy—combined with general uncertainty caused by the Russia-Ukraine war, government crackdowns, and persistent lockdowns—has increased the risk aversion of Chinese investors. The amount of money that newly-launched private investment funds were able to attract decreased by 44 percent in January from the previous month.

Investment in funds comprised of stocks and bonds dropped by 49 percent, while private equity decreased by 25 percent and venture capital by 17 percent.

Mutual funds were hit very hard, with new investment diminishing by 61 percent in January from a month earlier and 76 percent from a year prior.

Financial companies have canceled the launch of some of their new funds, while the subscription periods for other funds have been extended. Additionally, at least 16 IPOs have been delayed due to the Shanghai lockdown.

This downward trend in investment funds suggests that people may not have the investable cash they had a year ago. It seems that people are fearful of the generally bleak economic outlook and are holding onto their money rather than investing it. It could also represent a loss of confidence in the financial system. Either way, the result is that firms will have trouble finding the cash necessary to create jobs by expanding or launching new ventures.

During the first quarter, China’s largest real estate developers saw a decline of 40 percent, while new home sales were down between 20 percent and 30 percent compared to 2021.

Nomura Holdings Inc. expects the Chinese economy to continue to slow while the property sector will decline further. Consequently, it believes China may only achieve 4.3 percent growth this year. Nomura believes that the war and continued lockdowns, particularly in Shanghai, will prevent China from maintaining its first quarter momentum for the rest of the year.

Bloomberg estimates that the Shanghai lockdown alone could cut GDP growth by 4 percentage points. By some estimates, the COVID lockdowns are costing China $46 billion per month. Meanwhile, the areas with the highest risk of outbreaks account for 33 percent of GDP. Lockdowns across these regions would be incredibly damaging to China’s growth. Adding additional stress to the public debt, Shanghai will be dolling out $22 billion in tax relief, including refunds, to companies hurt by the lockdowns.

Oil consumption has already dropped off in China, a sure sign that economic and industrial activity is slowing. According to Bloomberg, industry experts have cut China’s oil demand forecast by 700,000 barrels per day for March, 600,000 per day for April, and 100,000 a day for May and June.

The official manufacturing Purchasing Managers’ Index (PMI), a measure of industrial output, fell from 50.2 in February to 49.5 in March. With the industrial sector accounting for roughly 33 percent of China’s GDP in 2021, a blow to this sector would be felt across the entire economy.

The non-manufacturing PMI, which is considered a measure of service-sector output, eased from 51.6 to 48.4 during the past two months. These figures are significant because both numbers have not declined simultaneously since February 2020, when much of the country was under tight COVID restrictions. This implies that the Chinese economy has been shrinking at the fastest pace since the beginning of the pandemic.

Natixis SA, a leading French corporate and investment management firm, estimates that lockdowns have cut China’s first quarter growth rate by 1.8 percentage points, driving its growth outlook for the year down to 4 percent. Nomura Holdings Inc. expects China’s central bank to cut interest rates by 50 basis points to stimulate growth. Macquarie Capital Ltd. forecast China’s GDP growth at 5 percent, positing that the lockdowns may not continue for an extended period and that the cut in interest rates will compensate.

Xi and the World

As Chinese leader Xi Jinping vies for his third term in office, a potential chink in his armor could be the economy. The social contract on which his regime rests is that the Chinese Communist Party (CCP) will provide citizens with a high degree of economic prosperity in exchange for the people ceding social control to the Party.

Another possible loss of legitimacy comes from Beijing’s rhetoric supporting the notion that the CCP can control the pandemic. Last month, China experienced the highest number of COVID cases in two years, locking down tens of millions of people in Jilin, Shenzhen, and Shanghai.

The Shanghai lockdown, which began on March 28, is expected to restrict the movements and lives of 26 million people in China’s financial hub. The question is whether the CCP and the people will believe that Xi’s performance with the economy and the pandemic qualify him as the “indispensable core leader.”

With factories locked down in Shenzhen and the financial industry in Shanghai under COVID restrictions, the impact on the United States and the world will be more supply chain disruptions. Fewer foreign companies will invest in China, and more firms will pull out. In the hopes of courting foreign investors, Beijing is easing investment restrictions, shortening the list of industries that foreigners cannot invest in.

China’s oil and gas demand will remain suppressed until restrictions are lifted. This dims Russia’s hopes of using increased energy sales to China to support its economy.

Meanwhile, with China’s economy on the rocks and with his third term looming, Xi is less likely to risk incurring U.S. secondary sanctions by aiding Russia. There is also a possibility that he would delay invading Taiwan to avoid sanctions and the economic damage that a war with the United States would inflict on China.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.


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Antonio Graceffo, Ph.D., has spent more than 20 years in Asia. He is a graduate of the Shanghai University of Sport and holds a China-MBA from Shanghai Jiaotong University. Graceffo works as an economics professor and China economic analyst, writing for various international media. Some of his books on China include "Beyond the Belt and Road: China’s Global Economic Expansion" and "A Short Course on the Chinese Economy."