Headwinds for the Red Dragon?
When China sneezes from COVID, the rest of the world gets infected.
It appears that the world’s second-largest economy isn’t out of the woods with the pandemic, and that enhances risks for the global economy. Below, I examine China’s predicament and what it means for investors.
Grappling with its fiercest COVID outbreak to date, China has been implementing a growing number of lockdowns and quarantines. China also has been closing borders. As of this writing, 87 of China’s 100 largest cities had mandated COVID restrictions on businesses and individuals.
Data released Monday by the Chinese government show that the country’s economy is still growing and hasn’t fallen off a cliff. That’s the good news.
China’s gross domestic product (GDP) grew by 4.8% on a year-over-year basis during the first three months of 2022, beating expectations of 4.3%. Industrial production in March climbed by 5% year-over-year, surpassing the estimate for 4.5% growth (see chart).
The news lifted U.S. and global equities Monday. In pre-market futures contracts Tuesday, the major U.S. equity indices were trading in the green. World stocks were mixed, with European benchmarks slipping as most Asian shares rose.
Diving deeper into the data…
From my perspective, the China GDP numbers are a mixed bag.
Those who want to be successful investors should always look behind the headlines for the real story. A closer look at the details of China’s latest economic report suggests problems ahead.
China’s lack of transparency and past accounting scandals continue to cast lingering doubts on the real health of the nation’s economy. Beijing is less than forthcoming when the country faces setbacks. Such is the nature of authoritarian regimes. But let’s examine the numbers that are in plain sight.
Retail sales in March fell by a more-than-expected 3.5% from a year earlier, versus an expected decline of only 1.6%, according to the National Bureau of Statistics on Monday. The unemployment rate throughout 31 major Chinese cities jumped from 5.4% in February to 6% in March, the highest level since such records began in 2018.
In addition, the majority of China’s first quarter GDP growth was recorded in January and February. Factory output sharply slowed in March, compared to the first two months of the year. That’s largely because of COVID restrictions imposed last month in Shenzhen, a technology hub, and Shanghai, the country’s biggest city.
In those COVID-stricken urban powerhouses, factories were shuttered and workers sent home. Trucks, ships and railroads were idled.
Beijing reaffirmed Monday that these two cities will remain in lockdown for several more weeks. Instead of spending money or working, millions of Chinese are stuck at home.
Another cloud is China’s tacit support of Russia in the latter’s invasion of Ukraine. Beijing’s early stance was to handle the crisis in Eastern Europe through waffling, but as usually happens with wars, events unfolded with a severity and speed that no one expected.
China is now trying to have it both ways. The country doesn’t want to overtly align with Russia, because doing so would condone civilian atrocities and alienate Western nations that are China’s largest trading partners. But on the other hand, China is intent on pushing back against what it views as U.S.-led Western hegemony.
China strives to be the world’s dominant superpower and believes it’s winning against the West, which it disdains as decadent and in decline. But siding more firmly with Russia would incur massive economic costs, such as tough Western sanctions and boycotts.
These adverse trends probably will show up in China’s next batch of quarterly GDP statistics. Economic planners in Beijing had set a goal of 5.5% year-over-year growth for this year. That target seems less likely now.
China’s draconian COVID measures also are fueling global inflation, by exacerbating supply chain disruptions and shortages of goods. In particular, Shanghai is a major source of tech components for transnational vehicle manufacturers; the city’s woes will continue to cause headaches for auto and truck makers, from Detroit to Frankfort.
Commodities make a classic hedge against inflation, which is running hot around the world. For details about a raw materials producer that’s positioned to prosper amid the conditions that I’ve just described, click here now.
John Persinos is the editorial director of Investing Daily.