A quarterly drop in GDP, which has only happened once before, underlines China’s slower rebound from coronavirus curbs than in 2020, providing less of a boost to a struggling global economy. Debate about the accuracy of official data will likely persist this year as President Xi Jinping urges officials to strive to meet an ambitious target for annual GDP growth of about 5.5%, while at the same time sticking with a Covid Zero policy that requires tough restrictions wherever virus cases emerge.
“There is no plausible story that GDP growth should be positive in the second quarter,” said Logan Wright, head of China markets research at Rhodium Group. “The downturn in household consumption is very significant within both the official retail sales data and other proxies. And the property sector remains a significant drag.”
The evidence from alternative indicators is overwhelming of an ongoing slump in the economy. Travel data shows passenger trips taken on China’s roads were mostly below last year’s levels into July, according to transport figures analyzed by TS Lombard. The number of domestic flights in the quarter was down 62% from the same period last year, according to data provider Variflight.
Covid cases in Shanghai doubled today. Earlier this week the newer BA5.2 subvariant was found in Xian and is now also in Beijing. The omicron variant appears to be mutating much more quickly than prior strains but is also resulting in less severe symptoms in most of the world. China has the complication of an unvaccinated population and is only now introducing vaccine mandates.
Against that background, slower economic growth is a reasonable expectation. The plan to accelerate bond issuance by borrowing from next year’s quota is a direct response to that challenge. It should provide much needed additional liquidity to the economy and help accelerate infrastructure spending.
The entire commodity complex rebounded on the news from deep short-term oversold conditions. China is the only country in the world at present that is actively printing hundreds of billions to support its economy. That’s a lifeline for speculative trades and is enough to spur a short covering rally in the wider commodity markets.
The China Fund Inc has a long history of paying outsized special dividends which contributes to volatility. The fund posted a large upside weekly key reversal in March and found support in the region of the low in May. It is now back testing the region of the 200-day MA and a clear downward dynamic would be required to question current scope for additional upside. Despite significant volatility, the fund has held a sequence of higher major reaction lows since the early 2000s.
The banking index’s negative response to the above news is noteworthy. It suggests investors want to see more overt support for the economy in the form of easier monetary conditions to