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After the onset of Covid-19 in 2020, China was the first major country to post an economic recovery. However, the outlook for China recovery has turned bleak in 2022 as the country contracted sharply in the second quarter, largely due to domestic troubles and waning global demand.
Beijing has implemented harsh measures to curtail the spread of the virus, with the zero-Covid policy nearly bringing economic activity to a standstill. However, macroeconomic data coming out of China shows that the country is on the path to recovery with asset managers turning positive on Chinese financial assets.
Indicators of China recovery
During the first half of 2022, China posted a growth of 2.6% year-on-year, with manufacturing taking the lead. The value added by high-tech manufacturing went up by 9.6% during the six months. Additionally, the value added to services was up by 1.8% during the same period.
China’s trade surplus hit a record in July, with the trade balance climbing to $101 bn. However, experts warned that the jump in trade figures won’t last due to a slowdown in global economies. For the first six months of 2022, China’s export and import of goods grew by 9.4% year-on-year, as per data from the National Bureau of Statistics.
While financial markets are seeing a dearth of new public listings, China saw a record fundraise of $57.8 bn from IPOs till August first week this year. China’s IPO market is bucking the wider trend of IPO-bound companies sitting out the volatility. However, an expert told Bloomberg that the rise in public listings is because the companies see difficult times ahead for China during the second half of 2022.
China’s CSI 300 index has been among the worst performers in the world, falling over 15% in the past year, but has recently recouped some of its losses as stimulus measures boosted investor confidence.
“The challenges faced by China’s economy in the last 12 months are well documented. Heading into the second half of the year, we believe that there is a compelling case for China A equities,” writes Michelle Qi, Head of Equities at Eastspring Investments.
Another metric for rising economic activity in China is the hefty imports of oil by the country. China’s July imports of crude oil rose from the lowest in four years to 37.33 million tonnes as Beijing eased Covid-19 restrictions.
Another move which is likely to spur heightened economic activity in the country is the easing of restrictions for Covid-19 travellers and inbound international flights. The country has halved the quarantine time for inbound travellers and cut the length of international flight suspensions to one week if they carry five Covid-infected passengers.
Over the weekend, China cut its key lending rates to spur economic growth and increase liquidity. Beijing has also doled out tax rebates, fee cuts, increased bond issuances, implemented reserve requirement ratio cuts, and is lending money to various sectors in a bid to provide support to the economy.
What’s hindering China recovery?
While China’s exports are booming, partly because of a weak yuan, domestic consumption has suffered due to China’s zero-Covid strategy. Retail sales have contracted in the months where the movement was restricted, and the travel and tourism sector has taken a hit as well. The movement of trucks too was weak, showcasing weak production.
“Sluggish domestic consumption as well as the adverse impact of the COVID-19 on manufacturing logistics and operations have also hit the confidence of manufacturers, a key contributing sector to the economy that plays a major role in driving metals demand,” writes S&P Global analyst Jing Zhang.
Separately, China’s auto sector was hit by Covid-19 lockdowns as factories stayed shut in industrial hub Shanghai. China Association of Automobile Manufacturers cut its 2022 vehicle sales forecast to 3% growth, down from the 5.4% growth it previously predicted. The association expects a 16% fall in the sales of commercial vehicles in 2022.
China’s real estate woes have plagued the economy since last year’s mega default by Evergrande. Since then, the property sector has come under pressure with more and more defaults by real estate developers. More recently, the mortgage crisis has added to the real estate sector problems in the country. The property crisis is far from over and market experts have opined that problems are likely to spill into other allied sectors, especially the financial sector.
China is dealing with declining new bank loans and a slowing credit demand due to the slowdown in its domestic economy. Growth has been stunted as the bad loan issue in the real estate sector has spooked the market. Commercial banks in the country have been raising record amounts of debt by issuing bonds to replenish capital to fund real estate projects and aid small and medium businesses.
Meanwhile, China is also facing a unique problem of youth unemployment, which could potentially cripple the economy going forward. More than 20% of youth in China were unemployed as of July 2022, and the figure is expected to rise as a fresh batch of graduates starts seeking jobs.
