China’s economy ended the year in a major slump as business and consumer spending plunged in December, with more disruption likely in the first few months of the year as Covid infections surge across the country.
(Bloomberg) — China’s economy ended the year in a major slump as business and consumer spending plunged in December, with more disruption likely in the first few months of the year as Covid infections surge across the country.
Official data over the weekend showed the decline in manufacturing worsened last month, while activity in the services sector plunged the most since February 2020.
Separately, a private survey of businesses by China Beige Book International on Monday suggests the economy contracted in the fourth quarter from a year earlier.
China’s abrupt ditching of strict Covid controls in December fueled a surge in infections in major cities, prompting people to stay home as they fell ill or feared becoming infected.
While the outbreak has likely peaked in places like Beijing, and economic activity is starting to rebound there, the virus is spreading fast across the country. A likely travel rush during the Lunar New Year holiday in late January could see cases spread to rural areas, disrupting activity in the first quarter.
Citigroup Inc. economists said December could be the low point for PMI and a recovery could be on the cards in coming months.
“A more broad-based recovery could start with peak infection,” Citigroup’s chief China economist Yu Xiangrong and his colleagues wrote in a note. “In addition, January and the Chinese New Year have traditionally been a low season for the Chinese economy.”
A private PMI survey on Tuesday confirmed the worsening decline in December. The Caixin manufacturing index — which covers mainly smaller, export-oriented businesses — dropped to 49 from 49.4 in November. Businesses were optimistic about the future though, with confidence in the 12-month outlook climbing to a 10-month high.
“China’s growth prospects have been improving with the reopening accelerating,” said Zhou Hao, chief economist at Guotai Junan International Holdings. “Overall, the darkest hour is gone.”
Economists expect a faster rebound once the infection wave peaks, with growth forecast to accelerate to 4.8% this year from an estimated 3% in 2022.
What Bloomberg’s Economists Say
December’s deeper contraction in the Caixin manufacturing PMI underscores the short-term damage from China’s abrupt Covid Zero exit. The survey suggests surging virus cases are taking a heavier toll on the demand-side of the economy. This aligns with the grim message from the official PMI over the weekend, but a sub-index showing plans for higher future production offers a silver lining. It indicates firms may already be looking forward to the eventual boost from reopening.
Chang Shu, chief Asia economist
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Stock investors have turned more bullish for the new year amid bets that China’s reopening from Covid curbs, while chaotic to begin with, will eventually boost the economy and corporate profits.
The Hang Seng China Enterprises Index, which tracks Chinese firms listed in Hong Kong, has surged 36% in the last two months, beating a broader index of Asian equities by more than 20 percentage points. The index is expected to rebound in 2023 after capping a third straight year of declines — a record losing streak since its inception in 1994.
Still, the recovery is likely to be bumpy and economic activity remains well below pre-pandemic levels.
Travel was relatively muted over the just passed three-day New Year holiday. The number of trips made was little changed from a year earlier, while tourism revenue was up 4% compared to the same period in 2022, the Ministry of Culture and Tourism said. Tourism revenue was just 35.1% of the levels reached in 2019, while the number of trips were 42.8%.
Policy Support
The lifting of the Covid curbs in December came at a time when the economy was already quite weak. Covid restrictions had pushed consumer and business sentiment close to record lows, the property market is in a record slump and overseas appetite for Chinese goods has plummeted.
China Beige Book, a provider of independent data, said its surveys suggest the economy grew only 2% last year.
“With the ongoing Covid tidal wave, investment sliding to a 10-quarter low, and new orders continuing to get battered, a meaningful first-quarter recovery is increasingly unrealistic,” said Derek Scissors, chief economist at CBBI.
Policymakers have pledged more fiscal and monetary support to aid the economy’s recovery this year. The Ministry of Finance said last week fiscal spending will be expanded “appropriately” in 2023 with the use of policy tools like the budget deficit. The central bank also vowed to support domestic demand and maintain credit growth.
China will likely cut interest rates and the reserve requirement ratio for banks in the first half of the year, while raising the fiscal deficit ratio for 2023, according to a survey of economists published in state media on Tuesday.
–With assistance from James Mayger and Shikhar Balwani.
(Updates with Caixin PMI, comment from economist.)
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