Page 17 - ISQ July 2022

INVESTMENT STRATEGY QUARTERLY

China’s Economy Reopens, But Outlook Unclear

Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services Ltd*

According to the IMF’s World Economic Outlook publication, And yet, when trade data for May was released in mid-June,
released back in April, China’s economy has slowed sharply where was the lockdown impact? China’s National Bureau for
Statistics (NBS) reported an unadjusted merchandise trade
following strong growth in 2021. The Fund’s data indicates
surplus of RMB 543.9bn in May, orders of magnitude higher
that China’s GDP grew by 8.1% last year, but is forecast to than the RMB 281.3bn reported one year ago. Further, the NBS
drop to just 4.4% this year before staging a partial revival, to reported a 15% increase in annualised exports in the May data,
5.1% in 2023. These forecasts are, however, little more than extraordinary when most port infrastructure was shuttered.
Imports increased by just 2.8% year on year. Really?
estimates or informed guesses as Chinese data collection
Isn’t Chinese import activity supposed to be surging? Industrial
has historically, and remains, shrouded in mystery. This materials, crude oil, gas? Marrying the big increase in exports
mystery has only deepened following the release of the with what amounts to a sharp drop in import volumes year-on-
most recent updates. year involves some serious arithmetical gymnastics.

What is known is that multiple lockdowns across a broad Now that China’s economy is reopening again, activity is
spectrum of cities and provinces, in an effort to contain thought likely to rebound swiftly back to pre-lockdown levels.
persistent Covid outbreaks, must have had a severely adverse However, largely anecdotal reports regarding the recovery in
impact on the country’s economic activity. Shanghai, China’s truck and port traffic must be treated with caution. The
critical commercial and financial hub, was locked down movement of goods does not necessarily signal a resumption
entirely for two months, while the capital, Beijing, also suffered in the production of goods. Are items filling containers’ recently
periodic quarantine measures. Add to that local reports that as manufactured’ or, more likely, products produced back in early
many as 100 other major cities, home to as much as one-third 2022 and subsequently lying idle in factory yards? The trans-
of the nation’s vast population, were affected too, including portation of such products to ports certainly serves to boost
critical port locations and a picture of unprecedented restric- the export component of GDP, but very likely at the cost of
tion on commercial activity emerges. falling inventories.

Initial evidence of economic damage was largely anecdotal, The natural caution regarding the accuracy of Chinese data on
stories of sales and supply chain disruption hampering the the part of outside observers has been lent added credence
revenue generation and earnings of Western businesses with following reports of a very high-profile difference of opinion
local operations. Starbucks reported a 23% drop in revenues in between two of China’s most powerful politicians. In late May,
what amounts to the company’s second-largest international Premier Mr Li Keqiang demanded that thousands of provincial
market. Tesla’s Shanghai plant only achieved a 70% pre-lock- and local leaders prioritise infrastructure spending and income
down production level by housing key workers on site. These support to bolster economic activity. This was not just an
reports marry with auto industry data reporting April produc- unprecedented step; it flew in direct contravention of the edicts
tion was 48% lower than March and 46% lower than year-ago of President Xi Jinping. The latter had earlier declared “Zero
levels. With the majority of quarantine restrictions only easing Covid” the country’s most urgent priority, eclipsing both
in early June, May data seemed sure to confirm further growth and inflation concerns.
weakness.
*An affiliate of Raymond James & Associates, Inc., and Raymond James Financial Services, Inc.

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