- The good news is China’s economy is in worse shape than the US’s.
- The bad news is China’s economy is in worse shape than the US’s.
- That means the Chinese economic cavalry isn’t coming to the rescue.
A good Tuesday to you on a cloudy morning in Asti.
I’ve downed my cup of joe and had a look at the Chinese economic data.
Sadly, there will be no cavalry coming to the rescue.
No deus ex machina to bail out Western politicians and save their jobs.
They will have to cop it, admit their policymaking is asinine, and reverse the damage they themselves caused.
Alas, that’s not going to happen, either.
The markets stabilized yesterday, but I think that’s short-lived.
We have 4% down days and 1% up days.
You don’t need to be a genius to figure out the mathematics isn’t on your side.
And now, we have China shooting itself in the foot with its zero-Covid policy.
Here’s a clue: we’re never getting to zero with an aerosolized, airborne virus that doesn’t kill anyone anymore.
No matter how many celebrities virtue signal
Credit: @birb_k via Twitter
But does that stop the Hari Seldons in the Chinese hierarchy from thinking they can control everything?
Of course not.
And now, their economy is paying for it.
Let’s have a look.
A huge thank you goes to my paisano, Mark Rossano, for his outstanding research and The Daily Shot for their great charts.
The Chinese Data is Awful
Chinese data was about as bad as expected, given a country-wide lockdown and the current zero-COVID policy.
The problem is this: if this is the official data, how bad are the actual numbers?
The manufacturing data showed steep contraction as it became near impossible to move raw materials, labor, and other vital components for factories to operate properly.
I always like to highlight how weak things have been before the current COVID outbreak.
It’s not like China was crushing it with a steep expansion.
Instead, China has been bumping along, showing marginal expansion.
We’ll look at the PMI numbers. But first, a quick reminder of what they are.
What’s the PMI?
From IHS Markit, the company that compiles the data:
Purchasing Managers’ Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment, and inventories.
The headline PMI is a number from 0 to 100.
A reading above 50 represents an expansion when compared with the previous month.
A reading below 50 represents a contraction
A reading at 50 indicates no change.
The further away from 50, the greater the level of change.
So many investors, analysts, and economists look at the PMI because it’s a reliable leading economic indicator (similar to the Philly Fed).
As you can see in the chart below, Chinese purchasing managers expect a contraction (whether you look at the official data or the IHS Markit data below).
Supplier Delivery Times
Given the rampant roadblocks and shuttered rest stops, it isn’t surprising that supplier delivery times have gotten much worse.
The CCP has taken broad steps to improve the logistical nightmare of moving everything throughout China.
It hasn’t been that effective because the penalties for a party official having COVID spread in their region are worse than delaying a truck from moving through their roads.
This has made for abysmal compliance with allowing trucks and equipment to move from city to city, let alone across provincial lines.
Due to low demand internally, enough inventory on-site allowed for normal operations.
It doesn’t mean things were moving at the same pace as previously, but there was enough backlog to keep operations active, albeit at reduced rates.
This means the “bump” in activity will be muted when considering GDP strength. The more significant impact remains on the internal consumer and the remaining spending problems.
New Orders
New Orders have fallen off a cliff.
But as we have highlighted previously, they have waffled between slightly position (expansionary) and negative (contraction).
This metric is a good indicator of future growth, and we see a lot of persistent headwinds as China comes out of the COVID lockdown.
Global trade has seen a considerable slowdown.
As global disposable income gets hit hard as wages fail to keep pace with inflation, we don’t see that adjusting in the near term.
This is leading to a large build in global inventories.
Are Workers That Expensive?
Labor and fuel are typically a straight pass-through, only moving higher across the board.
As March-June typically sees a big hiring boost, we had employment costs move back to new highs.
Given the tightness in the labor market, companies are paying up to bring on new employees.
The Chinese Communist Party (CCP) has been trying to drum up local spending through the “Dual Circulation Strategy” and “Common Prosperity” to drive more internal consumption.
Non-Manufacturing PMI
The non-manufacturing came in even worse as the lockdowns precluded people from spending.
Before the COVID outbreak, there was already a downward trajectory as pressure was already growing on the consumer.
Retail Sales
Retail sales were just about back to their pre-COVID levels but have quickly dropped off during this lockdown.
The chart below is misleading as it shows something much stronger vs. the actuals.
The cumulative growth of retail spending has been falling since 2018.
As unemployment remained elevated, it hit spending.
The holiday spending for Lunar New Year and other core holidays has been 30%-40% below the pre-COVID periods before the recent outbreaks.
With retail sales growth weak this year, the driving force in China’s economy is meant to be investment, especially in infrastructure.
However, the satellite data show that the much-anticipated investment stimulus didn’t materialize in March, despite official data showing a 12.5% increase in fixed-asset investment in infrastructure from a year ago.
The data published by the CCP just doesn’t jive with the coastal activity (easier to track) vs. what they report happening within the country.
Chinese Real Estate
The Chinese populace also has some of the most real estate exposure at about 60%-65%, while the U.S. averages about 27%-28%.
It gives you an idea of the amount of pain the recent real estate issues have caused the consumer as down payments are lost.
Loans and Consumption
The pressure on the consumer and concerns at the corporate level has shrunk the demand for credit.
But the availability of credit isn’t a problem. The issue is demand.
Many consumers and corporations are already levered to the gills, and no one is looking to take on more debt.
The CCP has been pushing the SPB (Special Purpose Bonds) again to support economic expansion, but these bonds have stopped providing any real value.
The CCP even called out that provinces had to write “good” bonds on “revenue-generating projects” because many of the projects invested in since 2018 are underwater.
This means that the projects fail to cover interest and principal and have a negative multiplier of about .87. So for every $1 invested, the investment only generates $0.87.
China’s Ports and Wrap Up
China is one of the most significant growth engines for the global economy when you look through estimates for 2022.
There is a lot of hope that China will save the day, but its ability to stimulate the world is gone.
China has been the buyer of last resort for over a decade now, and their ability to lever up their balance sheet is tapped out.
The flows from ports show something worse than the original outbreak, which will hit GDP much harder in the near term (above chart).
Exports were the primary way that China was able to grow.
China’s main growth engine is gone with slowing global activity and local COVID restrictions.
As real wages fall abroad and spending slows, it will be difficult for China to generate any meaningful growth, let alone hit its 5.5% target.
Global growth estimates have already been taken lower over the last few months.
It will likely take another hit as the Chinese restrictions persist and the fiscal/monetary response fails to materialize.
I wish I had better news.
Until tomorrow.
Freedom Financial News
