China is in the middle of a significant fall-off in economic activity and a drop in consumer confidence, according to economic data published by the country’s government in mid-May.
Chinese retail sales contracted 11.1 percent in April, according to the National Bureau of Statistics (NBS), a sharper drop than anticipated by economists. The decline came as many areas of the country were placed under lockdown, including Shanghai, and severe trading restrictions were instituted to limit the spread of an outbreak of the omicron variant of COVID-19,
Long a driver of catering and entertainment spending, as well as a key driver of economic growth, Chinese residential property sales dropped 46.6 percent in value year-on-year in April, the sharpest drop since August 2006, according to Reuters. Property sales between January and April fell 29.5 percent by value year-on-year.
Industrial output unexpectedly fell 2.9 percent in April from a year ago. China’s official unemployment is 6 percent, with the youth jobless rate at three times that level. And NBS data show China’s gross domestic product declined 0.68 percent year-over-year in April, China’s steepest drop since it faced the original COVID-19 outbreak in 2020. S&P Global Ratings has predicted China’s quarterly GDP growth could be as low as 0.5 percent, and Citigroup has downgraded its full-year 2022 growth forecast for China from 5.1 percent to 4.2 percent.
Recent investor uncertainty has contributed to a slide in the renminbi-to-U.S. dollar exchange rate, which has moved from CNY 6.37 to USD 1.00 up to CNY 6.80 to USD 1.00 over the past two weeks. Spain-based BBVA bank has predicted the exchange rate will slide above CNY 7.00 to USD 1.00 in coming months before recovering towards the end of the year.
A weaker yuan is usually a boon for Chinese exporters. However, COVID restrictions have limited business activities across China. Making matters worse, governmental authorities in Beijing have in recent days issued work-from-home guidelines to residents, suggesting a lockdown is imminent there.
And the benchmark services purchasing managers index (PMI), published by business magazine Caixin, fell to 36.2 in April, its lowest level since March 2020 and down from 42 in March. Companies surveyed blamed the COVID-19 lockdowns and travel restrictions for limiting activity and customer demand. Businesses reported they were letting workers go to cut costs and to cushion against rising energy and raw material prices. Even as margins are squeezed, Chinese companies are still having to cut prices in response to weak demand, Caixin reported, resulting in a drop in the Caixin PMI sales price index for the first time in eight months.
China’s heavy-handed approach to the recent omicron outbreak as part of its zero-COVID strategy is forcing some companies to reconsider their presence in the country, according to E.U. Chamber of Commerce in China Vice President Bettina Schoen-Behanzin.
"Business confidence has really taken a severe hit due to the ongoing erratic policies of the Shanghai lockdown," Schoen-Behanzin told Reuters. "Many companies and individuals are seriously considering their China presence."
While Chinese economists have called for stimulus spending to carry China through its current economic downturn, Beijing University Professor of Finance Michael Pettis has questioned the value of traditional infrastructure stimulus.
“The real weakness is on the demand side, but almost all of the economic measures implemented are supply-side measures,” he said.
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