CHina’s post-covid The recovery was to be earth-shattering. Instead, it just looks wobbly. After the first announcement of pent-up demand, the economic data for April fell short of expectations. In response, China’s equities faltered, government bond yields fell and the currency depreciated. The country’s trade-weighted exchange rate is now as weak as it was in November, when authorities locked down cities.
Will the May dates look any better? On the last day of the month, the National Bureau of Statistics released its Purchasing Managers’ Indices (pmiS). They showed that services output grew at a slower pace than in April and manufacturing activity contracted for the second straight month. Another manufacturing index from Caixin, a business publication, was more encouraging, perhaps because it gives less weight to domestic heavy industry, which may benefit less from a consumption-led recovery.
Both sentences pmiThey also suggest that the prices manufacturers pay for inputs and charge for outputs have fallen. Some economists now assume that producer prices – i.e. the prices that are collected at the “factory gate” – could have fallen by more than 4% in May compared to the previous year. Such price cuts hurt industrial profits, which in turn hurt investment in manufacturing. This has raised fears of a deflationary spiral.
As a result, China’s economy faces a growing risk of a “double dip,” says Bank Nomura’s Ting Lu. Growth from one quarter to the next can fall close to zero even when overall growth is comparable GDP with a year earlier, remains respectable.
Elsewhere in the world, weak growth is accompanied by uncomfortable inflation. This makes it more difficult for policy makers to know what to do. But China’s problems with faltering growth and falling inflation point in the same direction: towards looser monetary policy and looser fiscal policy.
Some investors worry the Chinese government isn’t worried enough. The central bank doesn’t seem worried about deflation. Even without major stimulus, the government is likely to meet its modest 5% growth target this year simply because the economy has been so weak over the last year.
This attitude will soon change, predicts Robin Xing from Bank Morgan Stanley. He points out that in 2015 and 2019, policymakers were quick to react when it came to production pmi fell below 50 for a few months. He is confident that the People’s Bank of China will lower reserve requirements for banks by July at the latest. He also believes China’s political banks, which lend to support development goals, will increase lending for infrastructure investments. That should be enough to make the slow a “hiccup”.
Others are less optimistic. The government will act, Mr. Lu argues, but small changes won’t assuage the gloom for long. A larger reaction faces other obstacles. Officials could lower interest rates, but that would hurt the profitability of banks, which already face losses on home loans. They could send more money to local governments, but many have a history of mis-spent funds on ill-conceived infrastructure. They could distribute cash directly to households, but creating the device would take time. In the past, the state was able to quickly boost the economy through real estate and infrastructure investments. Since then, Mr. Lu notes, his “toolbox has gotten smaller and smaller.” ■
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