SPOTLIGHT: CHINA

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TOP 2022 TREND, DRAGFLATION: CHINA’S ECONOMY IS SHRINKING

China’s Caixin purchasing managers index (PMI) for service industries plunged to 36.2 in April from 42 in March, IHS Markit reported on 4 May, signaling a growing weakness throughout the nation’s economy.

Readings below 50 indicate contraction; the lower the number, the harder the fall.

The subindex measuring service sector employment has been below 50 all year so far.

The service sector holds 40 percent of China’s jobs and comprises more than half of its overall economy.

The steep decline is second only to that seen in February 2020 during the onset of the COVID War, Bloomberg noted.

The shrinkage is a direct result of weeks-long lockdowns in 43 Chinese cities to contain the COVID virus.

"Some companies, affected by the drop in orders [as customers stayed home], laid off workers to lower costs," economist Wang Zhe with the Caixin Insight Group told Bloomberg. 

Tourist spending during the recent Labor Day holiday week was 43 percent below last year’s, the Ministry of Culture and Tourism reported, with people making 30 percent fewer trips this year. 

The government’s own PMI surveys show that manufacturing as well as non-manufacturing activity fell last month to their lowest levels since February 2020.

China’s economic output will shrink in this quarter, but rebound during this year’s second half, Fitch Ratings analysts predicted.

The International Monetary Fund has lowered its outlook for China’s growth this year to 4.4 percent, 20 percent below the government's stated goal of 5.5 percent.

Last week, Xi announced new infrastructure spending to goose the economy in an attempt to boost confidence among investors and the Chinese public.

TREND FORECAST: China’s dual circulation policy, which seeks to cultivate a thriving consumer economy alongside its manufacturing and export sectors, was working, but it is now in reverse.  

While China’s consumer economy had been slowing since late last year, as we have reported in “China’s Economy Grows 8.1 Percent in 2021” (18 Jan 2022), “IMF Cuts Outlook for China’s Economy” (1 Feb 2022), and “China’s Economy Contracted in March” (5 Apr 2022), it was still growing. But that trend, as a result of the draconian lockdowns, has flattened the economic curve. 

TREND FORECAST: China’s unjustified extreme reaction to a modest rise in virus cases as a percentage of the population has destroyed its chance of meeting its economic goals for the year.

It would have struggled to reach the goal even without locking down more than 40 cities and 325 million people: the war in Ukraine has trashed the world’s previous economic plans and forecasts, as we reported in “IMF Cuts Global Growth Forecast, Warns of “Doom Loop” (26 Apr 2022) and in earlier articles.

The only reliable economic forecast this year is that the world will not perform as well as had been expected before the Ukraine war began.

Even China’s ongoing effort to create a Self-Sufficient Economy, which we update in “China Makes Major Push Toward Economic Self-Sufficiency” in this issue, will not be effective enough soon enough to save it from entering a period of Dragflation, during which costs and prices will continue to rise as economic activity contracts.

BEIJING PLEDGES WAR ON COVID, FAILS TO MENTION ECONOMIC SUPPORT

At a 4 May meeting led by president Xi Jinping, the Politburo’s elite seven-member Standing Committee pledged all-out war on the COVID virus but failed to also promise support for the economy, which is staggering under lockdowns across the nation.

“Our prevention and control policies can withstand the test of history, our measures are scientific and effective,” a post-meeting committee statement said.  “We can win the battle…”

“Relaxation [of current lockdowns] will undoubtedly lead to massive numbers of infections, critical cases, and deaths, seriously impacting economic and social development and people’s lives and health,” the statement declared.

However, the statement failed to mention this year’s 5.5-percent growth target for the country’s GDP, a goal that has been repeatedly emphasized by Chinese officials, including Xi himself earlier this month.

As a result, “investors are growing increasingly nervous,” Bloomberg reported.  

China’s CSI 300 stock index cast off 2.5 percent on 5 May, bringing this year’s total loss to 21 percent. Hong Kong’s Hang Seng index was off as much as 5.5 percent.

Share prices of companies reliant on consumer spending took the brunt; online retailer Alibaba lost 7 percent and Tencent 5 percent on the day.

“Policy makers’ prioritization of common prosperity, nation rejuvenation goals, and now zero-Covid, could [get] in the way of profit maximization and equity market performance,” Bank of America strategists wrote in a 6 May note.

On the same day, the renminbi’s value clunked down to 6.68 to the dollar, tallying a 5-percent loss so far this year.

The yuan’s value fell below 6.7 to the dollar for the first time in 18 months.

The yuan’s decline signals a pattern that historically has accompanied a global flight from risk and falling global stock markets, Bank of America analysts wrote.

The group also predicted the yuan will sink to 6.8 against the dollar.

A weaker yuan could continue to drive out foreign investors, especially as other nations are raising interest rates. (See related stories in this issue.) 

In April, China saw the greatest outflow of foreign investment from the yuan on record.

“The bear case against China is growing,” Bloomberg noted. 

“There is no catalyst in the near term for a sustainable sentiment reversal in Chinese markets,” Morgan Stanley strategist Gilbert Wong said to Bloomberg.

TRENDPOST: China failed to learn one of the great lessons of the COVID War: isolate the vulnerable, take reasonable public health precautions, leave businesses and schools open, and let people go about their daily lives. 

And, what is forbidden in both Communist China and the dictatorial so-called “Democracies” is the message from governments to the people to get healthy, build up their immune systems and embrace whole health healing by taking vitamins and supplements to fight the virus. 

However, such suggestions are banned and denounced by the dealers of drugs and the politicians they pay off with “campaign contributions,” i.e., bribes and payoffs.

That failure will cost the country years of progress toward the success of its dual circulation economy (“China Announces Dual Circulation Economic Policy,” 9 Sep 2020), in which manufacturing and consumer spending hold equal shares of a robust economy, and toward its emergence as the world’s leading economy.

CHINA LOCKDOWNS CRIPPLE WORLD RETAILERS’ SALES

About 328 million Chinese residents in 43 cities are locked down at home, keeping retail stores dark, cash registers closed, and supply lines shut off, according to the Financial Times.

The lockdowns have crippled about 10 percent of the country’s economy, Goldman Sachs has calculated.

Yum China, the domestic owner of KFC and Pizza Hut brands, warned last week that the current lockdowns will have a “much more severe” impact on business than China’s COVID War in late 2019 and early 2020 did.

Last week, Starbucks—with 5,600 shops in China, its second-largest market—suspended its financial guidance for the year, citing uncertainty caused by China’s closures.

More than 70 percent of its stores have been affected by the shutdown, the company said.

Adidas reported operating profits down 38 percent to about $461 million in this year’s first quarter because of China’s lockdown and predicted the country’s anti-COVID policies will cost it about $211 million during this quarter.

More broadly, the lockdowns have sparked mass layoffs in the tech and logistics industries and property sales have ground to a halt, the FT said, prompting economists to cut their forecasts for China’s GDP growth this year.

Although residents of some Shanghai neighborhoods are now allowed out of their homes, shops and restaurants remain closed. Beijing has not formally locked down the city, but extreme public health dictates sharply restrict movement. 

FOREIGN BUSINESS WARN CHINA: “WE WILL VOTE WITH OUR FEET”

About 23 percent of foreign businesses operating in China are considering ceasing operations there, according to a late April survey of 372 companies by the European Union Chamber of Commerce in China.

The number mulling leaving is the highest in a decade, the chamber noted.

Seventy-eight percent of respondents said China’s extreme anti-COVID policy has made it less attractive to invest in.

“China has to change strategy,” chamber president Jörg Wuttke told the Financial Times.

“We’re trying to tell the Chinese government that if you don’t change, we will vote with our feet,” he said.

“The predictability of the Chinese market has gone,” he added. “That was the strength of China. The policy was always rational. This new dimension is like whack-a-mole.”

The lockdowns also have helped to crater China’s service economy and slow its manufacturing sector, as we report in “China’s Economy is Shrinking” in this issue.

Seven percent of companies answering the survey said they were thinking of leaving China because of the country’s support for Russia’s war in Ukraine.

TRENDPOST: We have said that China will own the 21st century because the business of China is business. Now China has deviated from that principle.

Because of its extreme reaction to a rise in the number of positive COVID tests, the business of China has—for now—become regulation and control.

As long as China’s government prioritizes its fear of COVID, its economy will continue to slide into Dragflation. The amount of time it spends there will push back the date by which it will become the world’s largest economy.

Although COVID extremism will hurt China in the short term, the power of its economy, especially compared with others in the world, will keep drawing investors back.

TOP 2022 TREND, DRAGFLATION: CHINA MAKES MAJOR PUSH TOWARD ECONOMIC SELF-SUFFICIENCY

Taking the international sanctions against Russia as a lesson, China is redoubling its efforts to become self-reliant.

The country is adding to its reserves of grains and oils, expanding its semiconductor industry, and strengthening its financial system’s international connections, driven by concerns that Western powers could levy punishing sanctions on it as they have on Russia.

Last week, president Xi Jinping gave all government agencies and state-owned firms a deadline of two years to turn in their personal computers and replace them with domestically made brands rather than run on domestically developed operating systems.

The order affects an estimated 50 million machines in government offices alone, according to Bloomberg.

U.S. brands Dell and HP will suffer as a result; Chinese-controlled Lenovo will reap the benefit.

Greater self-sufficiency could embolden Beijing to attack Taiwan or become more aggressive in offering aid to Russia, The Wall Street Journal reported.

The day after Russia invaded Ukraine, an editorial in the Communist Party People’s Daily newspaper said, “Independence and self-reliance ensure that the cause of the party and the people will continue to move from victory to victory.”

China’s manufacturing sector, and the world’s dependence on it, “is China’s advantage,” stated a March editorial in the state-controlled Global Times newspaper.

China exports a third of the world’s textiles, 27 percent of electronics, 20 percent of machinery, and almost all of the world’s rare earth metals, according to Harvard University’s Center for International Development.

In contrast, Russia’s manufacturing economy is weak and exports little other than minerals, timber, and other raw materials.

The U.S. has so much invested in China that, if those investments were abandoned or lost, the U.S. GDP would implode by $500 billion and the country’s businesses would lose $25 billion annually in profits, a U.S. Chamber of Commerce study warned last year.

China has few debts and around $3.2 trillion in foreign-exchange reserves, but how much of those reserves it could access if the West moved against it is unclear.

When Western allies imposed sanctions on Russia, the country was unable to touch about half of its $600 billion in reserves, which were deposited in the West.

TREND FORECAST: China began its quest for self-reliance two years ago, which we reported in “China Announces Dual Circulation Economic Policy” (9 Sep 2020) and updated in “In China, Domestic Brands Outpace Western Icons” (29 Jun 2021), and “Foreign Investors Pour Another $120 Billion Into Chinese Markets” (16 Nov 2021), among other articles.

Because of its unmatched industrial infrastructure and dictatorial government, China will maintain its advantage in expanding its self-reliance at the expense of other countries: as we reported in detailing our Top 2022 Trend of Self-Sufficient Economies, China is already forging global alliances that will guarantee its access to raw materials and resources of other nations.

China’s foresight and dedication to securing future supplies of key resources, domestically and among friendly nations, help to ensure its eventual dominance over the global economy. 

2 Comments
  1. Trevor Haws 1 week ago

    What about China’s gold reserves? I’ve heard it is five times as large as that of the U.S. — although, as usual, China can be deceitful about such things. When the dragflation hits hard worldwide, what will happen to gold prices?
    Might there be an unprecedented spike that China may be best positioned to capitalize on?
    Although, when the SHTF (nuclear war?) l expect to see massive, uncontrollable chaos — including looting — of all major food and supplies chain stores. If this meltdown happens, will people rather have a stack of gold coins, or a stack of food, water, and medicine on their dinner table?

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