It has been a volatile few weeks for China, from regulators announcing crackdown after crackdown, to the country being forced to ease monetary policy.
But China is also grappling with a bigger issue: rising cases of coronavirus caused by the Delta variant.
This has prompted China to launch a fresh batch of targeted lockdowns, travel restrictions and mass testing once again.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
So what is going on and what might it mean for the economy?
China’s Covid outbreak
China reported on Sunday 94 new locally-transmitted Covid cases, according to the National Health Commission. Further cause for alarm came in the form of 31 new imported cases, including eight in Shanghai, Guangdong, Yennain, and a handful in other cities including Beijing, Inner Mongolia and Sichuan, reports the China Daily.
While these numbers are strikingly low compared to the Delta experience in other parts of the world, the cases are still concerning. China came out of the initial pandemic relatively unscathed. Having been the first country to go into lockdown, it was also the first country to recover and enjoyed something of a V-shaped recovery.
The rise in cases now comes at a delicate time. It puts the recovery in doubt at a time when economic data shows that the world’s second largest economy was already struggling.
Data published over the weekend showed that Chinese exports grew by 19% in July year-on-year, below economists’ forecasts and significantly below June’s reading of 32%.
Indeed, at a time where most central banks around the world are talking about tapering or tightening monetary policy, China loosened policy last month by reducing banks’ reserve ratio requirements, making it easier for them to lend money.
My colleague John explained last month why China’s V-shaped recovery is a double-edged sword in a global economy and why it had to loosen policy.
To complicate things, factory gate prices (or producer prices), a key inflation measure, also rose in July. The rise came despite efforts by the country’s policymakers to prevent a commodity driven inflation.
What does this mean?
Producer price inflation (PPI) can be an early indicator of inflationary pressures. If factories have to pay higher costs for materials such as oil or metal, they will almost certainly try to pass these higher costs on to consumers, who in turn may demand higher wages.
Now of course, this is China and globally we’re still in the middle of a massive economic rebound. So we’re not talking about a recession here. However, the delta outbreak, among other things, has prompted major US banks such as Goldman Sachs and JP Morgan to downgrade their growth forecasts.
Goldman Sachs expects Chinese GDP growth to now come in at 8.3% in 2021, lower than a previous estimate of 8.6%. ”With the virus spreading to many of China’s provinces and local governments reacting swiftly to control the spread of the highly contagious delta variant, we have begun to see softening in national aggregate data.”
Goldman thinks that Chinese efforts to thwart the outbreaks will ultimately prevail and that growth will pick up in the fourth quarter. But in the meantime, will China’s decisions reverberate across all markets?
What exactly does it mean for investors?
The oil market certainly didn’t appreciate the news. The Brent benchmark shed as much as 4.5% on Monday as delta fears resurfaced. This is hardly surprising.
As Craig Erlam, senior markets analyst at OANDA puts it: “The fact that China is already importing lower numbers of crude, as well as other commodities like iron ore and copper, doesn't help the outlook or prices."
We have been through this cycle a few times already. Cases rise in some regions of the world, fear over growth rates spikes, and the more growth-sensitive markets (such as oil) wilt. As long as vaccines appear to keep working, then concerns over demand for energy products should be mollified.
That said, while 1.6 billion doses of vaccine are believed to have been administered in China, the country admitted earlier in April that local vaccines do not offer sufficient protection. So if hospitalisations and deaths continue to rise despite vaccinations then that could spell trouble for the global economy.
-
Barclays warns of significant rise in social media investment scamsInvestment scam victims are losing an average £14k, with 61% of those falling for one over social media. Here's how to spot one and keep your money safe
-
Over a thousand savings accounts now offer inflation-busting rates – how long will they stick around?The rate of UK inflation slowed again in March, boosting the opportunity for savers to earn real returns on cash in the bank. But you will need to act fast to secure the best deals.
-
UK wages grow at a record paceThe latest UK wages data will add pressure on the BoE to push interest rates even higher.
-
Trapped in a time of zombie governmentIt’s not just companies that are eking out an existence, says Max King. The state is in the twilight zone too.
-
America is in deep denial over debtThe downgrade in America’s credit rating was much criticised by the US government, says Alex Rankine. But was it a long time coming?
-
UK economy avoids stagnation with surprise growthGross domestic product increased by 0.2% in the second quarter and by 0.5% in June
-
Bank of England raises interest rates to 5.25%The Bank has hiked rates from 5% to 5.25%, marking the 14th increase in a row. We explain what it means for savers and homeowners - and whether more rate rises are on the horizon
-
UK wage growth hits a record highStubborn inflation fuels wage growth, hitting a 20-year record high. But unemployment jumps
-
UK inflation remains at 8.7% ‒ what it means for your moneyInflation was unmoved at 8.7% in the 12 months to May. What does this ‘sticky’ rate of inflation mean for your money?
-
VICE bankruptcy: how did it happen?Was the VICE bankruptcy inevitable? We look into how the once multibillion-dollar came crashing down.
