March PMIs signaled widespread deceleration in economic activities. China released its March PMI data with across the board weaknesses. Both Manufacturing and non-manufacturing PMIs fell below 50, the expansion-contraction threshold, to 49.5 (vs 50.2 in Feb.) and 48.4 (vs 51.6 in Feb.) respectively and below already subdue expectations. Most sub-indices fell from last month and went below 50. New orders came at 47.2 (vs 49 in Feb.). Employment and raw materials inventory were down to 48.6 (vs 49.2 in Feb.) and 47.3 (vs 48.1 in Feb) respectively. Services fell sharply to 46.7 (vs 50.5 in Feb) as this sector was most affected by the Covid related lockdowns and other restrictions on mobility of people. The only bright spot was construction which is a sub-index under non-manufacturing. The strength in construction mainly came from infrastructure related construction works. Separately, the Caixin China PMI Manufacturing, which focused on private industrial companies, also fell to 48.1 in March (vs 50.4 in February).
Exports are not going to help in 2022. PMI’s New export orders sub-index was 47.2 (vs 49.0 in February). This, taking together with the negative growth in throughput in the eight largest ports in China recently and declines in China to Europe and the U.S. West coast container freight rates, it is fair to expect that exports, last year’s GDP key growth driver, are set to lose momentum and decelerate in growth.
Resurgence of Covid-19 outbreaks contributed to the weakness in economic activities . In China, excluding Hong Kong, the total number of local Covid-19 cases has been subdue over a long period of time unitl February 2022 with the highest daily new cases, including symptomatic and asymptomatic cases, being 223 on Jan 20, 2021. However, the total number of new cases rose to 505 on March 7, 2022 and then continued to surge exponentially to 8,454 on Mar 30, 2022. These cases spread over 54 high-risk districts and 474 medium-risk districts in 15 provinces, two municipalities and one autonomous region.
High-risk districts are districts that have more than 50 cumulative cases and a cluster of epidemics occurred in the last 14 days. Medium-risk districts are districts that have newly confirmed cases in the last 14 days but the cumulative number of confirmed cases does not exceed 50, or districts that have cumulative number of confirmed cases exceeding 50 but no cluster of epidemics occurred in the last 14 days. According to Goldman Sachs’ estimates, cities with high-risk districts accounted for about 10% of China’s national GDP and cities with medium-risk districts represented 20% of national GDP. Covid related mobility restrictions or even lockdowns in these districts have significantly affected economic activities.
Expecting lockdowns as Covid outbreaks persist. Ahead of the Chinese Communist Party’s all important 20th Party Congress that is going to determine the leadership in the next five or even 10 years, large-scale Covid infection and mortality are simply unacceptable and out of the question for the Chinese authorities. As discussed in our previous note, China prides its effective administration of the “zero-Covid approach” for the Chinese economy’s impressive rebound from the pandemic before everyone else in 2021. It has been advocating to the country’s population as well as the rest of the world that this success as demonstration of President’s Xi’s socialism with Chinese characteristics for a new era. Although Xi Jinping said that “more effective measures should be taken to achieve maximum effect in prevention and control with minimum cost, and to reduce the impact on socioeconomic development as much as possible” in a meeting of the Central Committee of the Chinese Communist Party’s Politburo on March 17, 2022, it is unlikely for abandonment of the “dynamic zero-Covid” approach to happen and lockdowns are still to be expected when outbreaks persist.
Recent and future lockdowns will make China’s 5.5% GDP growth target for 2022 a huge challenge. Of the 8,454 cases on Mar 30, 2022, 5,301 cases or 62.7% are in Shanghai. It is worth to note that the March PMI survey took place before the staggered lockdown of Shanghai for mass Covid tests started on March 28, 2022. It is likely that the April PMI, once having taken in the full impact of the more recent surge of cases and the Shanghai staggered lockdown, will decelerate further. During the lockdown, many factories have suspended production, including Tesla’s plant in Shanghai. The mobility of people came to a halt and trucking capacity was reportedly cut by 30%. According to Nomura Securities, Maersk, the Danish container shipping giant, has closed its counter office and all of its warehouses in Shanghai from March 28, 2022 and the number of cargo ships queuing outside of the ports in Shanghai and nearby Ningbo have increased from 120 vessels to 168 as of March 30, 2022.
A recent economic research paper (Chen et al, 2022) uses historical data of changes in truck flows from 16 whole-city lockdowns and 18 partial (i.e. only some but not all counties/districts in a city) lockdowns in Chinese cities to estimate the economic cost of lockdown in China. Its findings suggest that the imposition of a full-scale lockdown for half-a-month on Shanghai will knock 4% off China’s GDP during that half-a-month. This implies a decline in annual national GDP by approximately 0.17%. It is also estimated that imposing one-month full-scale lockdown on China’s four largest 4 cities (Beijing, Guangzhou, Shanghai and Shenzhen) at the same time, the four cities will lose their real income by 61% for that month and the national GDP would fall by 12% for that month or approximately 1% for the year. This estimated cost is substantially higher than the 1% national annual GDP loss from a 4-week lockdown of all the high-risk and medium risk districts being put forwarded by Goldman Sachs. Escalation of lockdowns will be costly and make China’s 5.5% GDP growth target increasingly challenging.