“It’s still too soon to forget about the pandemic,” says John Authers on Bloomberg. With “lockdowns spreading from city to city”, it’s time to get ready for “a Chinese shock to global growth”.
Much of Shanghai, the world’s busiest port, has been in lockdown since late March. Now officials in Beijing have banned restaurant dining and required proof of a negative test to access public spaces as they scramble to avoid a similar outcome. Many of the city’s 22 million residents have already undergone three rounds of mandatory testing.
Fears that the capital could be locked down gave Chinese shares their worst day in more than two years on April 25. The benchmark CSI 300 index has fallen 18% since the start of the year, while April was the worst month for the yuan since 1994, according to Reuters. However, hints that more stimulus could be incoming prompted shares to rally more than 6% over the last three trading sessions of the month.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Stimulating a shuttered economy
There is a “good chance” that Beijing will avoid a Shanghai-style lockdown, says Neil Shearing of Capital Economics. Shenzhen and Tianjin have done a better job at stamping out virus clusters recently, but that doesn’t mean the outlook is bright. China’s robust recovery in 2020 was driven by a construction boom and strong global demand for its goods exports. But demand for goods is fading as consumption habits in advanced economies return to pre-pandemic norms. Meanwhile the “25-year property boom has run out of steam as urbanisation has slowed to a crawl”.
Investors’ spirits were lifted by reports that China’s government plans to speed up major construction projects and issue coupons to promote consumer spending. The relief looks “premature”, says Reshma Kapadia in Barron’s. While the government may temporarily ease its crackdown on the property sector – a key economic driver – flat buyers are likely to remain “skittish”.
Beijing still appears reluctant to engage in the large-scale fiscal splurge needed to offset the effects of lockdowns in key cities. In any case, there is a limit to how much you can stimulate an economy that is repeatedly shut down, says Bill Bishop in the Sinocism newsletter. “It is hard to be positive about the economy or the markets in the face of increasing lockdowns of indeterminate length and intensity.”
Another inflationary shock
China’s attempt to eradicate Covid will also affect global supply chains, says Aurora Almendral on Quartz. While ports are still open – unlike in previous lockdowns – “quarantine measures inland are resulting in some factory closures”. As a consequence, goods aren’t arriving at export terminals. That has seen export volumes from Shanghai shrink by nearly a third, Vincent Stamer of the Kiel Institute for the World Economy tells Deutsche Welle.
It takes about five to six weeks for a container ship to travel from Shanghai to Hamburg, and then another fortnight for the goods to reach their final destinations. Thus knock-on shortages – and another spurt of inflation – will be felt in Europe in around two months.
Nationwide: UK house prices creep up by 0.2% - are we heading for a rebound?
Nationwide’s latest house price index shows property prices inched up by 0.2% as demand warms up - will this trend go into 2024?
By Kalpana Fitzpatrick Published
December 2023 NS&I Premium Bond winners revealed - have you won the jackpot?
Two Premium Bond holders are now millionaires as NS&I reveals December winners. Find out if you’re one of them
By Vaishali Varu Published
UK wages grow at a record pace
The latest UK wages data will add pressure on the BoE to push interest rates even higher.
By Nicole García Mérida Published
Trapped in a time of zombie government
It’s not just companies that are eking out an existence, says Max King. The state is in the twilight zone too.
By Max King Published
America is in deep denial over debt
The downgrade in America’s credit rating was much criticised by the US government, says Alex Rankine. But was it a long time coming?
By Alex Rankine Published
UK economy avoids stagnation with surprise growth
Gross domestic product increased by 0.2% in the second quarter and by 0.5% in June
By Pedro Gonçalves Published
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
By Ruth Emery Published
UK wage growth hits a record high
Stubborn inflation fuels wage growth, hitting a 20-year record high. But unemployment jumps
By Vaishali Varu Published
UK inflation remains at 8.7% ‒ what it means for your money
Inflation was unmoved at 8.7% in the 12 months to May. What does this ‘sticky’ rate of inflation mean for your money?
By John Fitzsimons Published
VICE bankruptcy: how did it happen?
Was the VICE bankruptcy inevitable? We look into how the once multibillion-dollar came crashing down.
By Jane Lewis Published