Chinese data came in about as bad as could’ve been 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 prior to 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 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.
The reason so many investors, analysts, and economists look at the PMI is because it’s a reliable leading economic indicator (similar to the Philly Fed).
As you can see in the chart below, Chinese purchasing managers are expecting a contraction (whether you look at the official data or the IHS Markit data below it).
It isn’t surprising given the rampant roadblocks and shuttered rest stops that “supplier delivery times” have gotten exponentially 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 much worse than delaying a truck from moving through their roads.
This has made for some very poor compliance with allowing trucks and equipment to move from city to city let alone across provincial lines.
Next, look at supplier delivery times.
Supplier Delivery Times
Due to low demand internally, there was still a decent amount of inventory on-site allowing for some “normal” operations.
It doesn’t mean things were moving at the same pace as previously, but there was enough of a backlog to keep operations active, just at reduced rates.
This means the “bump” in activity will be muted when we consider GDP strength. The bigger impact remains on the internal consumer and the problems that remain with spending.
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 are seeing a lot of persistent headwinds as China comes out of the COVID lockdown.
Global trade has seen a very big slowdown.
We don’t see that adjusting in the near term as global disposable income gets hit hard as wages fail to keep pace with inflation.
This is leading to a large build in global inventories.
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.
Prior to 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 a bit misleading as it shows something that was much stronger vs the actuals.
The cumulative growth of retail spending has been falling since the end of 2018.
As unemployment remained elevated, it hit spending.
The holiday spending for Lunar New Year and other core holidays has been at least 30%-40% below the pre-COVID periods, and this was before the recent outbreaks.
The below charts put into context the issues we are describing.
The consumer has seen an increase in pain that has been around since the end of 2018, and it has only accelerated over the course of 2019/2020.
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 the much-anticipated investment stimulus didn’t materialize in March, despite official data showing a 12.5% increase in fixed-asset investment in infrastructure in March 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.
The Chinese populace also has some of the most exposure to the real estate sector at about 60%-65% on average of exposure 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 and other real estate investment products are.
Loans and Consumption
The pressure on the consumer and concerns at the corporate level has shrunken the demand for credit.
I’m sure you’ve seen stories from China about how they are going to increase the availability of credit, but the truth is the issue is DEMAND.
Many consumers and corporations are already levered to the gills, and no one is looking to take on more debt at this point.
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 just 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.
That’s why we keep pointing out the credit impulse measurement.
The PBoC has been trying to manage credit and pull some excess liquidity from the market, but they don’t want to create a panic.
It has been done slowly, and now they want to maintain the current flows.
The credit impulses are well off the bottom, but still not showing much growth as they are still negative over the last 12 months.
The PBoC has highlighted they want liquidity to still be pulled from the market, but averaging something closer to -1%.
This is why the market keeps being “surprised” that the PBoC isn’t being more accommodative… they can’t and won’t.
China is one of the biggest 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 has come and gone.
They have 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 that is worse than the original outbreak, which will hit GDP much harder in the near term.
Exports (global trade) were the main way that China was able to grow. With slowing global activity and local COVID restrictions, the main growth engine has been removed.
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, and it is likely to take another hit as the Chinese restrictions persist and the fiscal/monetary response fails to materialize.
I wish I had better news.
Until next time,
Freedom Financial News