(Bloomberg) – China’s economy ended the year on a major slump as business and consumer spending slumped in December, with further disruption likely in the early months of the year as Covid infections surge across the country.
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Official data over the weekend showed that the contraction in manufacturing has worsened over the past month, while service sector activity has fallen the most since February 2020.
Separately, a private survey of companies by China Beige Book International on Monday suggests the economy contracted in the fourth quarter from a year earlier.
China’s abrupt abandonment of strict Covid controls in December led to a surge in infections in major cities, prompting people to stay home if they fell ill or feared catching the virus.
While the outbreak is likely to have peaked in places like Beijing and economic activity there is beginning to pick up, the virus is spreading rapidly across the country. A likely rush of travel during the Lunar New Year holiday in late January could see cases spread to rural areas and disrupt first-quarter activity.
Citigroup Inc. economists said December could be the bottom for PMI and a recovery could be in sight in the coming months.
“A broader recovery may begin at the peak of the infection,” Citigroup’s Chinese chief economist Yu Xiangrong and his colleagues wrote in a note. “In addition, January and Chinese New Year are traditionally a low season for the Chinese economy.”
A private PMI survey on Tuesday confirmed the deteriorating decline in December. The Caixin manufacturing index — which includes mostly smaller, export-oriented companies — fell to 49 from 49.4 in November. However, companies were optimistic about the future, with confidence in the 12-month outlook falling to a 10- monthly high climbed.
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“China’s growth prospects have improved as reopening accelerates,” said Zhou Hao, chief economist at Guotai Junan International Holdings. “All in all, the darkest hour is over.”
Economists expect a faster recovery once the infection wave has peaked, with growth accelerating to 4.8% this year from an estimated 3% in 2022.
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The deeper decline in the Caixin Manufacturing PMI in December underscores the near-term damage from China’s abrupt exit from Covid Zero. The survey suggests rising virus cases are putting more strain on the demand side of the economy. This is consistent with the gloomy message from the weekend’s official PMI, but a sub-index showing plans for higher future production offers a silver lining. This suggests that businesses may already be looking forward to the potential boost from reopening.
Chang Shu, chief economist for Asia
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Equity investors have turned more optimistic for the new year amid bets that China’s reopening from Covid restrictions, while chaotic at first, will ultimately boost the economy and corporate earnings.
The Hang Seng China Enterprises Index, which tracks Chinese companies listed in Hong Kong, is up 36% over the past two months, beating a broader index of Asian equities by more than 20 percentage points. The index is expected to rebound in 2023 after overcoming a third straight year of declines – a record losing streak since its inception in 1994.
Still, the recovery is likely to be bumpy and economic activity is likely to remain well below pre-pandemic levels.
Travel has been relatively subdued over the recent three-day New Year holiday. The number of trips made has hardly changed from a year earlier, while tourism revenue increased by 4% compared to the same period in 2022, the Ministry of Culture and Tourism said. Tourism revenue accounted for only 35.1% of the level reached in 2019, while the number of trips was 42.8%.
policy support
The lifting of the Covid curbs in December came at a time when the economy was already quite weak. Covid restrictions had pushed consumer and business sentiment near record lows, the housing market is in a record slump and overseas appetite for Chinese goods has plummeted.
China Beige Book, a provider of independent data, said its surveys suggest the economy grew just 2% last year.
“With the ongoing Covid tide, with capital expenditure slipping to a 10-quarter low and orders still battered, a meaningful recovery in the first quarter is becoming increasingly unrealistic,” said Derek Scissors, chief economist at CBBI.
Policymakers have pledged more fiscal and monetary support to help the economy recover this year. The Treasury said last week that budget spending will be expanded “appropriately” in 2023 using policy tools such as the budget deficit. The central bank also pledged to support domestic demand and sustain credit growth.
China is likely to cut interest rates and the reserve requirement ratio for banks in the first half of the year while raising the fiscal deficit ratio for 2023, according to a survey of economists released by state media on Tuesday.
–Assisted by James Mayger and Shikhar Balwani.
(Updates with Caixin PMI, comment from an economist.)
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