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China's Yo-Yo Economy

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    July 24, 2022 10:40 PM EDT

    China's Yo-Yo Economy

    Although an economic rebound in China is underway according to government and private sector data, its economy and stock market may remain volatile.To get more china business market news, you can visit shine news official website.
    The Chinese are said to have invented the yo-yo over 2,500 years ago and this year, China's economy and stock market seem to be imitating one. The plunge in economic activity during the COVID lockdowns that took place from March through May of this year (the first provincial lockdowns since Wuhan and Hubei in January 2020) resulted in the GDP of the world's second-largest economy falling by -2.6% in the second quarter. But a rebound began in June, according to government and private sector data. China's stocks have also acted like a yo-yo this year with a bear market rebounding into a bull market.

    COVID lockdowns are still possible in the months ahead. Although they may not be as severe as in March and April, they may still act as a drag on growth. Meanwhile, fiscal and monetary stimulus could accelerate growth in the second half of the year. The continued back-and-forth of lockdown and rebound means China's economy—and stock market—could remain volatile.
    A drop in GDP is a rare event in China. China hasn't reported negative GDP growth in over 30 years, except for one quarter during the 2020 pandemic, as you can see in the chart below. We wrote about China's sharp economic downturn in early May (Recession in China?) noting that "The world's second-largest economy and consumer market has likely slipped into a recession, at least by China's standards."

    So far, China appears unlikely to see two quarters of back-to-back declines in GDP. The economy began to recover in May and June, mainly due to a sequential easing in COVID restrictions and more policy support amid the reopening of some large cities such as Shanghai. The easing of restrictions particularly benefitted industrial production; the manufacturing Purchasing Managers' Index (PMI) survey of business leaders jumped back above the 50 level in June, the strongest reading in over a year, as shown in the chart below. Specifically, growth in automobile production surged to +26.8% year-over-year in June from -4.8% in May as auto supply chains continued to improve after Shanghai's reopening.

    Outside of manufacturing, other signs of rebounding growth in June emerged:

    Retail sales growth jumped to a stronger-than-expected +3.1% year-over-year pace in June from -6.7% in May. COVID-sensitive catering sales growth improved to -4.0% from -21.1%.
    Business fixed asset investment growth increased to +5.9% year-over-year in June from +4.7% in May, thanks to more policy support.
    Unemployment rates declined modestly in June, suggesting labor market pressure has eased slightly.
    June borrowing, a sign of confidence and future growth, came in above expectations. The rapid credit growth in June likely reflected a combination of strong fiscal policy support (record-high single-month government bond issuance), further easing in credit supply (the People's Bank of China urged banks to accelerate loan extensions) and easing COVID restrictions lifting activity.
    What may be the only bull market in the world right now is taking place in China. The MSCI China Index has risen over 20% from its low on March 15, even as other stock markets, including the S&P 500 Index, have continued to decline.

    While the lockdowns of March through May weighed only modestly on the performance of China's stocks, additional lockdowns amidst a more rapidly slowing global economy and tightening monetary policy in western nations may have a greater impact in the future. While any easing of trade relations between China and western nations may aid China's stock market, tougher trade and capital policies being discussed in Washington and any breakdown of discussions over audit transparency of Chinese companies traded in the U.S. could hurt.

    What happens in China doesn't stay in China, due to China's large economy and influence on global trade. That said, the disruptions to supply chains during the second quarter were smaller in size relative to 2021, as inventory levels for many goods have caught up and demand shifted toward services. If China comes to embrace living with COVID rather than continuing lockdowns, it could give a boost to confidence in continued global growth. In the meantime, China's economy and stock market may remain volatile.