Woes Continue as China Reels toward Recession

By Glenn Dyer | More Articles by Glenn Dyer

If the Chinese economy is not in a recession, it is so close to one that it could topple over in the next couple weeks as President Xi Jinping’s harsh Covid elimination policy strangles demand and growth at all levels in the world’s second-largest economy.

In fact the monthly data on production, retail sales, investment and employment confirmed that the sluggishness seen in March accelerated in April, thanks to the way the widening COVID-19 lockdowns took a heavy toll on consumption in particular, along with employment.

It is not an exaggeration to say that the Chinese economy is contracting and it is all their own work.

Barring a surge of the type seen in April a year ago, there’s no way June will see a rebound in activity and the Chinese economy will contract for the three months to June 30.

The “increasingly grim and complex international environment and greater shock of [the] Covid-19 pandemic at home obviously exceeded expectation, new downward pressure on the economy continued to grow,” China’s National Bureau of Statistics said in a statement with the release of the data.

The bureau said the impact of Covid is temporary and that the economy “is expected to stabilise and recover.”

But foreign analysts are cutting their GDP forecasts

The National Australia Bank economists have analysed the April production, retail sales, investment, lending, trade and inflation figures and slashed their GDP forecast to a new low.

The Chinese government has estimated GDP this year will rise at around 5.5% from the rebound boosted 8.1% in 2021. The March quarter saw growth slow to 4.8% which many foreign investors reckoned was better than expected. Now that looks like an outlier.

The NAB says there are still risks that there are still risks “of further Shanghai-style lockdowns… implying downside risk to our forecasts and further disruption to already impaired global supply chains. We now expect China’s economy to grow by 4.2% in 2022 (from 5.0% previously) and 5.6% in 2023 (from 5.4% previously).”

Late Sunday night the China’s central bank trimmed mortgage rates to 4.4% from 4.6% but that was tokenism with real estate activity moribund in much of the country because of the downturn and the lockdowns.

The cut was aimed at first home buyers and will “promote the stable and healthy development of the property market,” the central bank said in Sunday night’s statement.

But Friday’s weak lending data for April was highlighted by a surprise 60.5 billion yuan ($US9 billion) contraction in new mortgages issued in the month.

But the central bank didn’t cut a key market lending rate on Monday, despite the worst set of data since February 2020.

The People’s Bank of China maintained the rate on the one-year medium-term lending facility (MLF) at 2.85%, while rolling over 100 billion yuan of maturing securities (around $US15 billion) without adding additional liquidity, according to a notice on its website.

Full or partial lockdowns were imposed in dozens of cities in March and April, including a protracted shutdown in commercial centre Shanghai as well as much of Beijing

Retail sales fell by 11.1% in April from a year ago, much, much more than the 6.1% decline forecast in a Reuters poll.

Industrial production dropped by 2.9% in April from a year ago (crude steel production was down 5.2% from April, 2022), in contrast with expectations for a slight increase of 0.4%.

Last month, the persistent spread of Covid and resulting stay-home orders mostly in Shanghai, but in parts of Beijing as well and other centres— forced factories to close or operate at sharply limited capacity.

Fixed-asset investment for the first four months of the year rose by 6.8% from a year ago, and that was due to the stronger level of investment in the first two months of the year.

In fact, quarter on quarter real fixed asset investment contracted by an annual rate of 3.5% (from a 1.0% increase in March), according to national Australia Bank analysis.

Investment in real estate declined by 2.7%, while that in manufacturing rose by 12.2.% and that in infrastructure rose by 6.5%.

China’s vehicle production fell 47.6% (with passenger car sales down 41%) but sales of New Energy Vehicles remain buoyant and was the only bright spot in the month’s data.

The auto sector in China accounts for about one-sixth of jobs and roughly 10% of retail sales.

The unemployment rate in China’s 31 largest cities climbed to a new high of 6.7% in April, according to data going back at least to 2018.

The unemployment rate across all cities rose by 0.3 percentage points from March to 6.1% in April.

The jobless rate among those aged 16 to 24 was nearly three times higher at a massive 18.2% – that’s a looming political problem for President Xi.


The key production data for Australian investors was Chinese crude steel production which showed a surprise rise in April from March, despite the Covid lockdowns impacting auto production as well as building and construction in Shanghai, parts of Beijing and other centres.

Data from the National Bureau of Statistics showed a 5.1% rise in crude steel production in April to 92.78 million tonnes from March’s 88.3 million tonnes.

But that was still down 5.2% from April 2021 which is just about when the Chinese government started its attempts to limit what it saw as overproduction.

Average daily output in April was 3.09 million tonnes, according to Reuters analysis of the NBS data. That compared with 2.85 million tonnes of daily production in March.

In the first four months, China made 336.15 million tonnes of the metal, down 10.3% from same period a year ago, the statistics bureau said.

China has pledged to continue to cut its steel output this year, vowing an annual decline that analysts say will take the 12-month figure to under 1 billion tonnes for the first time in six years.


And there’s a growing danger on China’s capital account.

Foreigners are sending billions of dollars a day of invested funds out of the country, selling the Yuan and driving it down.

This selling has accelerated since the start of April when the Covid lockdown was thrown over all of Shanghai, crystalising gathering fears based on outbreaks elsewhere.

The National Australia Bank says that since the start of April, the yuan has depreciated by over 5.6% against the US dollar, while the yield on 10-year US Treasuries has exceeded that of China’s 10-year government bond since early April.

“With the Federal Reserve set to lift rates significantly across the remainder of this year (with the risk of further increases in 2023 as well), continued monetary policy imbalance risks capital outflows that could destabilise China’s financial sector,” the NAB warned.

Other economists have started wondering if this will finally see the Chinese central bank push down more key lending rates, or as it cold ver well do, re-impose some type of capital controls to limit the selling of the yuan and the repatriation of dollars.

The central bank cut the foreign exchange account reserve ratios a fortnight ago to give Chinese banks more room to support the yuan but that doesn’t seem to have worked.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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