The Overall Economic Slowdown that China Urgently Needs to Deal With
A meeting of the Political Bureau of the Communist Party of China (CPC) Central Committee on April 29 stressed the need to “accelerate the implementation of previously announced policies, including tax and fee cuts and rebates, and make good use of various monetary policy tools” It further mentioned that, “the country should plan for incremental policy tools, and grasp the implementation of goal-oriented policies”.
Recently, heads of several ministries and commissions, including the National Development and Reform Commission, the Ministry of Finance, and the People’s Bank of China, have spoken out or held meetings to implement the guidelines of the Political Bureau of the CPC Central Committee. Judging from the moves of ministries and commissions, a series of measures to stabilize the overall economy will be accelerated, and incremental policy tools are expected to release signals of stabilizing growth and ramping up policy tools.
It is now urgent for China to step up its policy efforts to stabilize economic growth. Under the impact of external geopolitical turmoil, pandemic, and the downward trend of the country’s economy, the Chinese economic growth has now entered a stage of overall slowdown.
Both manufacturing and service sector activity in China shrank significantly as a result of the pandemic. According to the National Bureau of Statistics, the purchasing managers’ index (PMI) of China’s manufacturing industry was 47.4% in April, which was a decrease of 2.1 points, being the lowest reading since March 2020. The non-manufacturing business activity index was 41.9 points in April, 6.5 points lower than the previous month. The Caixin China general manufacturing PMI also fell to 46% in April, down 2.1 points from March and the lowest reading since March 2020. The Caixin China general services PMI fell sharply to 36.2, indicating a continued marked contraction in services activity.
Various data also show that the impact of the COVID-19 pandemic on the Chinese economy cannot be underestimated. Data compiled by Sheng Songcheng, adjunct professor of economics and finance at the China Europe International Business School (CEIBS) and his team show that as of April 24, movie theater attendance of the country had fallen to its lowest value since the resumption of operation on July 20, 2020. During the week of the May holiday, the attendance rebounded to 5.6609 million, but that was still well below the 30.1983 million of the same period last year. A number of domestic flights were affected and canceled due to travel restrictions. As of May 4, the number of flights (excluding Hong Kong, Macao, and Taiwan) was only 4,917, down from 15,967 in the same period last year; a whopping 8,848 flights were canceled, compared with 1,385 in the same period last year. According to the Chinese Ministry of Culture and Tourism, 160 million trips were made by domestic tourists during the May holiday, down 30.2% year on year, with domestic tourism revenue reaching RMB 64.68 billion, down 42.9% year on year. The spread of the pandemic has further restricted the movement of freight vehicles, causing serious logistical disruptions. As of April 30, Shanghai and Jilin’s trucking flow index fell to a low of 17 and 38 respectively (the base value is 100), indicating that the transportation of raw materials and finished products is facing difficulties; while Jiangsu’s trucking flow index has been less than the overall national level since April.
Foreign trade, a key driver of China’s economic growth last year, is likely to slow significantly or even turn negative growth this year, according to new data. According to the latest statistics from China Customs, in the first four months of this year, China’s total import and export value amounted to RMB 12.58 trillion, up 7.9% from the same period last year. Of this, exports reached RMB 6.97 trillion, up 10.3%; imports were RMB 5.61 trillion, up 5%; the trade surplus was RMB 1.36 trillion, an increase of 39.2%. In dollar terms, China’s total import and export value in the first four months was USD 1.98 trillion, up 10.1%. Of this, exports reached USD 1.09 trillion, up 12.5%; imports reached USD 881.42 billion, up 7.1%; the trade surplus reached USD 212.93 billion, an increase of 42.3%.
Some people may wonder why there is so much to worry about when China’s exports in the first four months of this year maintained double-digit growth and its trade surplus grew by around 40% year on year. Looking at the growth and trend of foreign trade, it is easy to see where the problems lie. In dollar terms, the value of China’s exports in April was USD 273.62 billion, up 3.9% year on year, while the value of imports was USD 222.50 billion, unchanged from the same period last year (i.e., up 0% year on year). In yuan terms, China’s exports in April amounted to RMB 1.74 trillion, up just 1.9% from a year earlier, while imports amounted to RMB 1.41 trillion, down 2% year on year.
Figure: China Imports, Exports YoY Growth Rate (%), Mar 2021-Apr 2022
As can be seen, the foreign trade growth is rapidly declining, with export and import growth falling to single digits growth and negative growth respectively in April. Researchers at ANBOUND have predicted in the past that China’s exports would be hit hard this year as international geopolitical turmoil affects external demand and the impact of the pandemic in China exacerbates investment outflows and production offshoring. Now it seems that such a trend is becoming more and more obvious. In 2021, China’s total import and export value amounted to USD 6.05 trillion, up 30.0% year on year. Of this, exports reached USD 3.36 trillion, up 29.9%; imports reached USD 2.69 trillion, up 30.1%. In the first quarter of this year, China’s exports grew 15.8%, while imports slowed even more sharply to 9.6%. In dollar terms, exports and imports slowed to 3.9% and 0% respectively in April. It is clear that foreign trade is unlikely to be an effective factor driving Chinese economic growth this year. Instead, it is likely to drag down the growth.
Judging from the current situation, the pandemic is still spreading in many places in China, and it is difficult to anticipate when the control measures will be fully relaxed and the normal economic environment restored. However, it is expected that the Chinese economy is likely to have an unexpected downturn in the first half of this year. Some Chinese scholars expect that the economy will grow at around 2.1% in the second quarter and 3.5% in the first half of this year. As for the annual economic growth rate, it is difficult to predict because there are too many uncertainties. Even Stephen Roach, former chairman of Morgan Stanley Asia, who has been bullish on China’s economy for decades, is turning bearish on China’s economy, saying it could grow only about 4% this year. If the Chinese economic growth rate were to plummet to around 4% from 8.1% in 2021, it would be a decline with huge impacts.
Final analysis conclusion:
China’s economic growth has entered a period of overall slowdown, and it is extremely urgent for its authority to stabilize the growth and the society. This will be a major political issue for the country this year.
Writer by He Jun
Partner, Director of China Macro-Economic Research Team and Senior Researcher. His research field covers China’s macro-economy, energy industry and public policy.
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