China's economic activity collapses under Xi's COVID Zero policy

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Chetan Ahya, Morgan Stanley’s chief Asia economist, said supply chain pressures likely peaked in April and there’s optimism about some improvement going forward. His team still said its estimate of growth fut the full year is “leaning towards our bear case of 3.5%.”

“It looks like you will see some kind of solution to the supply chain issues in China over the next few weeks,” he said in an interview on Bloomberg TV. “And Shanghai reopening is definitely one important factor that we are looking at as well. So yes, there are going to be a lot of challenges for the rest of the world, but looks like the worst is behind us.”

Beijing has signaled that policy makers will step up support for the economy, with Premier Li Keqiang recently urging officials to ensure stability through fiscal and monetary policy.

The People’s Bank of China took steps on Sunday to ease a housing crunch by reducing mortgage rates for first-time homebuyers. However, it left the interest rate on one-year policy loans unchanged on Monday, as inflation pressure and worries about capital outflows reduce the scope for more easing.

“It is clear that the impact of lockdowns, or the fear of lockdowns, overwhelmed any economic easing, and the Shanghai lockdown had ripple effects across the nation,” said Wei Yao, head of research for Asia Pacific and chief economist at Societe Generale SA. If the surge in unemployment “does not raise the urgency of adjusting the zero-COVID measures to allow the economy to normalize, we don’t know what will,” she said.

The National Bureau of Statistics said the COVID outbreaks had a “big impact” on the economy in April, but the effects are likely to be short-lived. “With progress in COVID controls and policies to stabilize the economy taking effect, the economy is likely to recover gradually,” it said, adding that it doesn’t expect GDP to contract in the second quarter.

Fixed-asset investment remained a bright spot, increasing 6.8% in the first four months of the year, likely supported by the government’s push to expand infrastructure spending. However, the figure didn’t stack up against monthly data showing a plunge in manufacturing and materials used in construction — cement output was down 18.9% in April; production of crude steel and steel products both dropped more than 5%; the production of cars plunged 44%; and total manufacturing output dropped 4.6%.


Electricity generation fell 4.3% in April from a year ago, as power demand from factory floors to steel mills and shopping malls waned amid the virus restrictions.

Monetary stimulus is proving less effective in the face of COVID lockdowns, with data on Friday showing businesses and consumers had little appetite to borrow in April. Credit growth weakened sharply last month, with new yuan loans sinking to the lowest level since December 2017.

Despite the PBOC’s unchanged stance on policy rates, banks could cut their main lending rates on Friday, which would help to further lower mortgage rates for homebuyers. However, economists say the impact will be fairly limited.

China’s housing market is a crucial source of growth for the domestic economy but has been in a slump for almost a year, with sales dropping at a double-digit pace every month since August 2021 and prices of new homes also falling after a government crackdown on indebted property developers.

Investment in property development fell 2.7% in the first four months of the year, while the value of homes sales dropped 32%, the data showed.

“The biggest problem that we currently see is the continued current pressure on credit, and to the extent that the business confidence is being shaken, and therefore credit demand is now fundamentally being damaged,” Helen Qiao, economist for Greater China at Bank of America, said in an interview on Bloomberg TV. “And therefore it takes more than just a simple interest rate cut to boost the credit demand.”

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