China’s Economic Recovery Looks Nowhere in Sight. Property, Factory, and Retail Sectors Slide.

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Manufacturing, retail sales and employment figures in China are each underperforming analysts’ expectations.

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A property market in free-fall, shrinking factory activity, and stocks down sharply since a June high—these are just a few signs of a Chinese economy that can’t get back on its feet, even as it has largely brought its Covid outbreaks under control.

China’s official manufacturing purchasing managers’ Index ( PMI ) shrank to 49.0 in July from 50.2 in June, falling below the 50-point mark that separates contraction from expansion, the National Bureau of Statistics (NBS) said Sunday. This was well below analysts’ predictions.

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The sub-indexes for output, new orders, and employment all fell. In fact, unemployment rose for the fourth consecutive month in July, hitting its highest reading since April 2020, largely on the back of weak demand for manufactured goods.

The official PMI looks mainly at large and state-owned firms. A separate, independent gauge—the China Caixin/Markit manufacturing PMI—remained barely in expansionary territory, though it weakened significantly from June’s 51.7. Unlike the official PMI, the Caixin gauge tracks are smaller, private, and more innovative companies.

The two PMIs together paint a picture of the broadly softening of China’s manufacturing industries.

“Appetite for credit declined, with pent-up demand down everywhere. A very small group of firms seem to be enjoying preferential credit access, while the rest sit on the sidelines,” said Shehzad Qazi, managing director of China Beige Book (CBB), said in a report released Monday.

It wasn’t merely manufacturing that languished. Growth in services revenue inched down, while that for retail sales plummeted to 19 from 28 on a diffusion index compiled by CBB.

“Retailing is in the most trouble, with revenue growth falling for a fourth consecutive month. Firm death is almost certainly occurring in the sector now,” CBB’s Chief Economist, Derek Scissors, said in the Monday report.

The consultancy’s CEO, Leland Miller, summarized the broader situation plaguing the world’s second-largest economy: “Beware the July rebound narrative. Markets are convinced that easing lockdowns mean the worst is over, but July data show that firms are still largely refusing to invest, borrow, and especially now, hire. This is likely because companies simply do not believe that their Covid Zero nightmare is over.”

Among the biggest drag on the country’s growth remains property. China’s top 100 developers experienced a 37.9% year-on-year fall in July sales, according to data provider China Real Estate Information Corporation. Hong Kong and mainland shares for the sector tanked Monday as a result.

The sector is still reeling from a widespread boycott in which homeowners are refuting to pay for their unfinished units. Adding to this, the country’s most indebted developer, China Evergrande Group,
over the weekend failed to submit its promised ‘preliminary restructuring plan.”

As developers are unable to restructure, a chain of events negatively impacts the firms themselves, investors, and homebuyers, who much all settle for less than they invested. As the Evergrande default hit the news, the term contagion sprung back up over fears for the industry.

Markets, meanwhile, have fluctuated, but have largely fallen steadily over the last month, after a high that was reached as Shanghai’s two-month draconian Covid lockdown ended.

The benchmark Shanghai Composite Index is down 5% since the beginning of July, while the large-cap CSI 300 Index has fallen 8%. Across the border in Hong Kong, the Hang Seng Index has fared the worst, tumbling 11% over the last 30 days.

In a sign of official recognition of the market instability, the head of the securities regular, Yi Huiman, penned a lengthy article Monday in prestigious Communist Party journal Qiushi clarifying the government’s position on current conditions.

“The stock market goes up and down as a rule, and the government should not intervene in normal fluctuations,” he said. “However, non-intervention is not laissez-faire. We must always adhere to the bottom-line thinking and resolutely prevent ‘market failures’ from causing abnormal fluctuations.”

Yet the most confounding aspect of China’s current crisis is the government’s repeated assertion that no large-scale stimulus is on the way. Moreover, regardless of resurgences in Covid cases and the need for lockdowns, the country will strictly adhere to its zero-Covid policy, which has been the largest driver of its weak growth so far this year. In the first half of 2022, China’s economy expanded 2.5%, making its 2022 goal set at the beginning of the year of “around 5.5%” looking increasingly out of reach.


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