- China’s services and consumption data were strong in April, in line with expectations from consumers who are leading the way as pent-up demand is unleashed – but the extension of the resurgence from services to goods is still limited.
- Georgios Leontaris, EMEA chief investment officer at HSBC Global Private Banking and Wealth, told CNBC on Monday that the combination of weak demand for labor and goods could force the Chinese government and central bank to act.
- Despite the weakness in April data, Hui Shan, chief China economist at Goldman Sachs, said there was little sign of macroeconomic easing anytime soon, while the PBOC’s first-quarter monetary policy report sounded “neutral”.
The view from the observation deck of the Shanghai Tower in Shanghai, China, Sunday, April 9, 2023. China’s economic recovery is gaining momentum after Covid restrictions were abruptly lifted and the real estate market is stabilizing, although the recovery is still quite patchy and expected by policymakers have no intention of scaling back monetary support yet. Photographer: Qilai Shen/Bloomberg via Getty Images
Qilai Shen | Bloomberg | Getty Images
China’s much-vaunted economic recovery from the end of strict zero-Covid lockdown measures has yet to materialize in full, prompting some economists to speculate that further fiscal stimulus or monetary easing may be on the horizon.
China’s services and consumption data posted strong results in April, in line with expectations from consumers ahead as pent-up demand is unleashed — but the rebound in demand for services is not yet translating into higher demand for goods , due in part to unemployment, remains high.
Earnings at major Chinese industrial companies fell 20.6% yoy between January and April. Manufacturing activity also fell for the first time in three months, according to Caixin China’s General Manufacturing Purchasing Managers’ Index.
Industrial production rose 5.6% yoy in April, a month-on-month acceleration, but reached only half the rate of expansion expected by economists surveyed.
The labor market also remains fragile. Data from China Bureau of Statistics shows that 6 million of the 96 million 16-24 year olds in the urban workforce are currently unemployed. Based on this number, Goldman Sachs estimates that there are now 3 million more unemployed urban youth compared to the period prior to the Covid-19 pandemic.
In a research note on Monday, Capital Economics concluded that China’s economic recovery was still progressing at the start of the second quarter, despite some moderation, and that there was room for further improvements in the services sector.
“Indeed, more recent data, including Labor Day data, suggests that travel and consumer spending were still growing this month,” said China economist Sheana Yue and China chief executive Julian Evans-Pritchard.
“But as the difficult external picture continues to cloud export prospects, housing market difficulties persist and broad policy support is unlikely, sequential quarter-on-quarter growth will moderate for the remainder of the year.”
More economic stimulus, targeted easing
Georgios Leontaris, EMEA chief investment officer at HSBC Global Private Banking and Wealth, told CNBC on Monday that the combination of weak demand for labor and goods could force the Chinese government and central bank to act.
“The way we see things is that China needs to provide a bit more fiscal stimulus, including some more targeted easing,” he said.
“Ultimately, unemployment, especially among the youth population, is too high and they need to bring it down to meet their growth targets going forward.”
China’s ruling Communist Party has set an economic growth target of “around 5%” for 2023 – the country’s lowest in more than three decades. China’s GDP grew 4.5% in the first quarter as the economy emerged from tough Covid restrictions that had been in place for nearly three years. These are generally expected to weaken in the second quarter.
In March, the People’s Bank of China announced that it would lower the reserve requirement ratio (RRR) for banks for the first time this year to support the nascent economic recovery.
China’s State Council in April announced a 15-point plan to more efficiently match young jobseekers to jobs. However, analysts have pointed to longer-term structural imbalances in the country’s labor market.
Despite the weaker April data, Hui Shan, chief China economist at Goldman Sachs, said there was little sign of macroeconomic easing anytime soon, while the central bank’s first-quarter monetary policy report sounded “neutral”.
“Many recent policy announcements have focused on medium-term issues such as ‘modern industrial system’, ‘unified national market’ and the new financial regulatory framework,” Shan noted last week.
“Of course, interbank liquidity has been adequately maintained and we expect the central bank to likely cut reserve requirements in June to boost confidence. But we don’t expect a rate cut or major fiscal stimulus unless there’s a sharp drop in US exports in the coming months.”
Given the weak recovery, any consensus among economists on the course of fiscal and monetary policy appears to be shattering.
Morgan Stanley hinted earlier this month that there could be “measured additional easing” from the central bank from late June to late July, citing the limited impact of the services sector recovery on the goods sector and an “incomplete” recovery in the labor market.
“At the same time, infrastructure investment — a key pillar of the economy over the past nine months to help support job growth — is slowing amid mounting funding pressures after policy frontloading in the first quarter,” said the bank’s Asia-Pacific research team.
“With weaker-than-expected second-quarter growth and a negative output gap, labor market pressures could persist, posing a risk to social stability. We therefore believe further policy easing is needed to sustain the recovery.”