BEIJING (BLOOMBERG, REUTERS) - China’s economy had a stronger-than-expected start to the year but the outlook remains grim as the nation battles its worst Covid-19 outbreak since Wuhan two years ago and Russia’s invasion of Ukraine throws global financial markets and energy prices into turmoil.
Consumer spending on shopping and eating out, and investment by state-owned companies, grew strongly in the first two months of the year, official data showed on Tuesday (March 15). That was before the country began recording large-scale Omicron virus outbreaks and locking down major cities like Changchun and Shenzhen.
Morgan Stanley has cut its economic growth forecast for China to zero for the current quarter, and predicts that Beijing will miss its annual growth target this year thanks to restrictive policies to stop the spread of Covid-19. It previously saw the economy growing 0.6 per cent this quarter compared with the previous three months.
The bank made the changes after China placed the city of Shenzhen into lockdown for at least a week and forbade people from leaving Jilin province - the first time the government has sealed off an entire province since early 2020.
“The double lockdowns sent a clear message that Beijing is prioritising Covid-19 containment over the economy, and a recalibration of its Covid-19 strategy will likely be delayed,” Morgan Stanley economists wrote in a note on March 13.
Beijing has set an ambitious economic growth target of about 5.5 per cent for the year, suggesting it could help stabilise a global economy reeling from Russia’s Ukraine invasion. But economists are doubtful of that goal, with tighter virus controls disrupting manufacturing, an ongoing contraction in the country’s huge property market showing no signs of easing and an oil price hike pushing up business and consumer costs.
“There are certainly big downside risks in March as the government is likely to have prioritised Covid-19 control before economic growth,” said Mr Larry Hu, an economist at Macquarie Capital. “More policy support will be needed.”
The strong January-February data likely caused the People’s Bank of China (PBOC) to hold off on cutting interest rates, confounding the expectations of the majority of economists in a Bloomberg survey who had expected a 10-basis-point reduction in the one-year policy loan rate.
The surprise decision comes a day before the US Federal Reserve is expected to deliver its first interest rate hike in three years and analysts say Beijing may want to avoid widening policy divergence for the time being.
Major global central banks, including those in the United States, Britain and Japan, are scheduled to meet this week, with most of them set to turn hawkish in monetary policy stance. China’s policy divergence could prompt capital outflow risks.
The PBOC did inject a net 100 billion yuan (S$21.4 billion) of funds into the financial system.
Chinese markets have been whipsawed in recent days, with stocks in Hong Kong and China plunging amid concerns over the country’s ties with Russia and persistent regulatory pressure. The benchmark Shanghai Composite Index pared losses after the data was released on Tuesday morning, before plunging again in afternoon trading to close down 4.95 per cent.
China reported more than 5,000 new coronavirus infections for Monday and the lockdowns and restrictions to contain that spread are a substantial threat to China’s outlook and could push global inflation higher if factory or port closures become widespread and persistent. Key Apple supplier Hon Hai Precision Industry said it was halting production at its sites in Shenzhen, while Toyota Motor has stopped its plant in Changchun city.
Goldman Sachs warned last week that higher oil prices could subtract half a percentage point from China’s growth. Australia and New Zealand Banking Group estimates that about half of China’s gross domestic product would be affected if lockdowns become more widespread, and could subtract 0.8 percentage point from its GDP growth rate.
