China is at risk of self-inflicted recession

3 minute read

A worker in a protective suit sits on plastic stools following the coronavirus disease (COVID-19) outbreak in Shanghai, China March 30, 2022. REUTERS/Aly Song/File Photo - RC2OCT9LXCG1

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HONG KONG, April 13 (Reuters Breakingviews) - China’s stubborn battle to eradicate Omicron is raising the risk of a serious economic crisis. Nearly one-third of the population is under some sort of lockdown, with shops shut and factories struggling. Policy easing looks unavoidable, but with benchmark yields dropping below U.S. Treasury bonds, so does capital flight.

The outbreak read more in Shanghai, where asymptomatic cases are running at around 25,000 a day despite two weeks of rigorous lockdown, is prompting other regions to impose draconian measures pre-emptively. At least 373 million people in cities contributing to 40% of China’s GDP have been affected, a Nomura survey showed. Key indicators are already reflecting the shock. Domestic sales of passenger cars fell over 10% in March, per official data; an index tracking freight traffic in China dropped by about 25% during the first week of April.

China contained the initial outbreak in 2020 quickly and resumed production, allowing its manufacturing sector to tap export markets to revive growth after a single quarter of contraction. Omicron is far more infectious, yet Beijing aims to reproduce that result. Officials appear to be realising that won’t be easy. With the war in Ukraine pushing up commodities costs, and demand for Chinese exports cooling as inflation spikes in key overseas markets, premier Li Keqiang this week warned of “unexpected changes” in the external and domestic environment that would require more urgent, aggressive measures.

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Fiscal stimulus and infrastructure spending will be hard to implement during lockdowns, which leaves monetary policy. Cutting interest rates and reserve ratios, however, is tricky given the increasingly hawkish U.S. Federal Reserve. Yields on China's 10-year government bonds fell below U.S. Treasury yields for the first time in 12 years on Monday; local inflation rates are still lower but rising quickly. If sharp currency depreciation ensues, Beijing might face a repeat of the capital outflows it struggled to contain in 2015. There are already signs foreign investors are evacuating. read more

For private businesses, uncertainty as to when lockdowns will end, and whether they will resume soon after, will deter investment and job creation regardless of the cost of credit. Consumers rushing to hoard food before they get sealed inside their flats are unlikely to spend on other goods. The longer Beijing digs its heels on zero Covid, the closer a recession will get.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)


- At a forum held with local government officials on April 11, Premier Li Keqiang said the government must be vigilant against “unexpected changes” in the international and domestic environment that are putting downward pressure on the Chinese economy. Li urged officials to speed implementation of policy measures announced earlier in the year, ranging from tax cuts and special-purpose government bond issuance to ensuring stable energy supply.

- Yields on China's 10-year government bonds fell below U.S. Treasury yields for the first time in 12 years on April 11, Reuters reported.

- Chinese banks extended 3.1 trillion yuan ($490 billion) in new yuan loans in March, up sharply from February and exceeding analyst expectations, data released by the People's Bank of China on April 11 showed.

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Editing by Pete Sweeney and Katrina Hamlin

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Beijing, crunching economic data, interviewing high-level officials, and travelling to far-flung provinces to visit factory floors and talk to local shopkeepers. Before that, she spent nearly three years in Santiago, Chile, where she built a trade news website reporting on the produce industry – and developed Spanish as a third language alongside Mandarin Chinese and English.