China's economy ends year in major slump as Covid infections surge

China’s economy ended the year in a major slump as business and consumer spending plunged in December, with more disruption likely in the first few months of the year as Covid infections surge across the country.
 

Official data over the weekend showed the decline in manufacturing worsened last month, while activity in the services sector plunged the most since February 2020. 

Separately, a private survey of businesses by China Beige Book International on Monday suggests the economy contracted in the fourth quarter from a year earlier.   

China’s abrupt ditching of strict Covid controls in December fueled a surge in infections in major cities, prompting people to stay home as they fell ill or feared becoming infected. 

While the outbreak has likely peaked in places like Beijing, and economic activity is starting to rebound there, the virus is spreading fast across the country. A likely travel rush during the Lunar New Year holiday in late January could see cases spread to rural areas, disrupting activity in the first quarter. 

A private PMI survey due on Tuesday will likely also confirm the worsening decline in December. The Caixin manufacturing index probably dropped to 49.1 from 49.4 in November, according to economists surveyed by Bloomberg.  

Citigroup Inc. economists said December could be the low point for PMI and a recovery could be on the cards in coming months.

“A more broad-based recovery could start with peak infection,” Citigroup’s chief China economist Yu Xiangrong and his colleagues wrote in a note. “In addition, January and the Chinese New Year have traditionally been a low season for the Chinese economy.” 

Travel was relatively muted over the just passed three-day New Year holiday. The number of trips made was little changed from a year earlier, while tourism revenue was up 4% compared to the same period in 2022, the Ministry of Culture and Tourism said. The figures were well below pre-pandemic levels though: tourism revenue and the number of trips were 35.1% and 42.8% of 2019 levels respectively.

The lifting of the Covid curbs came at a time when the economy was already quite weak. Covid restrictions had pushed consumer and business sentiment close to record lows, the property market is in a record slump and overseas appetite for Chinese goods has plummeted.

Economists predict China’s economy grew just 3% in 2022. China Beige Book, a provider of independent data, said its surveys suggest the economy grew only 2% last year.

“With the ongoing Covid tidal wave, investment sliding to a 10-quarter low, and new orders continuing to get battered, a meaningful first-quarter recovery is increasingly unrealistic,” said Derek Scissors, chief economist at CBBI.

Markets Rally

Economists see the possibility of a faster and stronger rebound later in 2023. After the likely slow start in the January-to-March period, growth is projected to pick up to 4.8% for the year, according to the median estimate of economists surveyed by Bloomberg.

Stock investors have turned more bullish for the new year amid bets that China’s reopening from Covid curbs, while chaotic to begin with, will eventually boost the economy and corporate profits.

The Hang Seng China Enterprises Index, which tracks Chinese firms listed in Hong Kong, has surged 36% in the last two months, beating a broader index of Asian equities by more than 20 percentage points. The index is expected to rebound in 2023 after capping a third straight year of declines — a record losing streak since its inception in 1994. 

Policymakers have pledged more fiscal and monetary support to aid the economy’s recovery this year. The Ministry of Finance said last week fiscal spending will be expanded “appropriately” in 2023 with the use of policy tools like the budget deficit. The central bank also vowed to support domestic demand and maintain credit growth.

China will likely 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 published in state media on Tuesday.  

Highlights of China’s Official Purchasing Managers’ Index

• Manufacturing PMI fell to 47 in December from 48 in November — and worse than an estimate of 47.8 in a Bloomberg survey of economists
• A reading below 50 indicates contraction in activity, while anything above suggests expansion
• Non-manufacturing index, which measures activity in the construction and services sectors, declined to 41.6 from 46.7 in November, lower than the consensus estimate of 45
• Services PMI, a sub-index of the non-manufacturing gauge, fell to 39.4 from 45.1 in November
• Manufacturing PMI gauges measuring output, new orders and employment all contracted in December at a faster pace than the month before. A sub-index measuring suppliers’ delivery times also fell further, a sign of supply disruptions