China's economic news is scary. -- China Boss update 5.20.22
Update -- *No weekend update next week (Friday 27th) or newsletter the following week (Monday 30th).
What’s going on.
A perfect storm of geopolitics, disruptions to supply chains from the war in Ukraine, and draconian Covid-zero lockdowns is battering China’s economy. The latest business news headlines are awash with “dire” reports on struggling tech stocks, collapsing businesses, a falling currency, ongoing brain drain, expat exodus, new property defaults and massive capital outflows. China Boss doesn’t recall a time in the post-Mao era when the Middle Kingdom’s economic situation seemed so gloomy. And that’s the news we know about.
The latest economic news.
Tech stocks are struggling
China Tech Stocks Suffer Renewed Selling as Growth Worries Mount (Charlotte Yang, Bloomberg)
Yang, Bloomberg:
A slew of disappointing economic data from China has underscored the growing toll of the lockdowns, and market watchers say the outlook will stay dim unless that stance shifts.
On the mainland, the CSI 300 Index slid 2.5%, while Hong Kong’s benchmark Hang Seng Index was down 3.8%, the most since mid-March. Major equities gauges across Hong Kong and China all posted weekly losses.
“Although the valuation for Chinese tech giants have been largely beaten down over the past one year, we may have to see a clear control of China’s virus situation or more follow through in support measures in order to lift market confidence,” said Jun Rong Yeap, a strategist at IG Asia Pte. “With relief catalysts such as earnings seasons and Fed meeting largely behind us now, markets are in need of a new relief catalyst.”
Small businesses and a county once deemed a model of success are buckling under lockdowns
China’s small businesses buckle under lockdowns, as expats exit (Andy Peñafuerte, Aljazeera)
Peñafuerte, Aljazeera:
Stuck at home without work, Li’s teachers are being tested daily for COVID-19 until at least Wednesday, following district authorities’ announcement of mass testing in urban districts over the weekend.
“I have the same question as everyone else,” Li, who asked to use a pseudonym, told Al Jazeera. “‘Should I continue [my business] or just close it entirely?’ How can the government support small and medium enterprises? Without clear rules, we are shrouded in uncertainty.”
China’s most economically competitive county buckles under lockdown (Yaling Jiang, South China Morning Post)
Jiang, SCMP:
Since the lockdown began, most economic activity had ground to a halt in Jiangyin, which has an economy the size of some provinces and has become an icon of China’s manufacturing capabilities. It is home to 58 listed companies, the most of any Chinese county, such as solar module manufacturer Jiangsu Akcome Science & Technology, fashion group HLA and Xingcheng Special Steel. A Beijing-based think tank ranked Jiangyin as the most competitive county in China last year.
Under a nationwide “dynamic zero” approach to containing the virus, Jiangyin has resorted to draconian social controls.
. . . With no signs of when lockdown measures will ease, Jiangyin serves as another example of how Beijing’s dynamic zero policy has turned an integrated economy into a hodgepodge of fragmented, beggar-thy-neighbour regimes under lockdown.
Expats are leaving as fast as they can
‘Get me out of here’: China’s historic expat exodus (Will Glasgow, The Australian)
Glasgow, The Australian:
Up to half China’s expats have left the country since the start of the pandemic.
Jorg Wuttke, the Beijing-based president of the EU Chamber of Commerce in China, thinks that population will halve again by the end of the Chinese school year – only two months away.
That will leave about a quarter of the pre-pandemic expat population. Many of the rest are weighing their options.
China’s small businesses buckle under lockdowns, as expats exit (Andy Peñafuerte, Aljazeera)
Peñafuerte, Aljazeera:
The American Chamber of Commerce in China (AmCham China) said recently it is “bracing for a mass exodus of foreign talent this summer”, while “fewer employees overseas [are] willing to take up open positions in China.”
“For two years, we have strongly advocated for an easing to business travel restrictions, there have been some improvements, but, today, it’s still as hard as ever to travel to China,” AmCham China Chairman Colm Rafferty said following the release of a flash survey of its members earlier this month.
Emphasis added.
Locals are leaving, too
China’s small businesses buckle under lockdowns, as expats exit (Andy Peñafuerte, Aljazeera)
Peñafuerte, Aljazeera:
Beijing-based financial consultant John Curry said the expat exodus is affecting individuals more than foreign businesses.
“The vast majority of these foreign businesses are still Chinese – so it is still more homegrown talent,” Curry told Al Jazeera.
China’s Covid Lockdowns Drive Middle-Class Citizens to Go Abroad (Shen Lu and Stella Yifan Xie, Wall Street Journal)
Lu and Xie, WSJ:
Immigration lawyers and agents say they have seen a surge in inquiries over the past month. Emigration-focused chat groups have sprung up on China’s ubiquitous WeChat messaging app as well as on encrypted platforms like Telegram.
Over the past two months, said Ying Cao, a New York-based immigration lawyer, inquiries from Chinese high-net-worth individuals and middle-class professionals have surged 10-fold compared with a year earlier.
“They feel like it’s 1949 all over again,” said Ms. Cao, referring to the exodus of more than two million Chinese people to Taiwan and Hong Kong as the Communist Party won control of the Chinese mainland. “There is a shared sense of fear and urgency to get out.”
Capital poured out of China in Q1
China capital outflows surge on geopolitical risks and Covid lockdowns (Shweta Jain, The National News)
Jain, The National News:
China recorded the largest quarterly capital outflows on record in the first quarter on the back of Covid-19 lockdowns, depreciation and the perceived risk of investing in countries whose relationships with the West are complicated, according to the Institute of International Finance (IIF).
Investors sold equities and bonds, with local currency bonds accounting for most of the outflows, the institute said in a report on Wednesday. Outflows from government and development bank bonds started in February and picked up in March.
Russia selling part of its estimated $70 billion in reserves allocated to China was also partly responsible for the huge outflow.
“Portfolio outflows from China reached unprecedented proportions in the first quarter. In the big picture, they are unlikely to cause noticeable external funding issues,” the IIF said, without providing an exact figure.
“Reserve sales by Russia may explain some of the outflows at the beginning of the [Ukraine] war, but we are unconvinced they are driving this episode."
China’s third-largest developer just defaulted
China's third largest developer just defaulted — and the worst may be yet to come (Samuel Yang, ABC News (AU))
Yang, ABC News (AU):
Betty Wang, senior China economist from ANZ Research, said Sunac's default was "another blow to the fragile property sector".
"The shock to the market confidence, especially in the private sector segment, was quite big," she told the ABC.
"If people regarded Evergrande as an extreme case, it should not be happening to many other developers, especially those with relatively healthy financial performance.
"There are a lot of downside risks in the economy."
China’s export boom appears to be over and the yuan is in a nosedive
China’s extraordinary export boom comes to an end (The Economist)
The Economist:
Optimists had hoped that China’s export machine could weather occasional outbreaks of the Omicron variant. Workers, they pointed out, could isolate themselves on the job, living where they work in a so-called “closed loop”. But no modern factory is entirely self-contained; every “closed” loop must remain open to its suppliers. And if any loop in the supply chain succumbs to the virus, it can disrupt production in all of them. Tesla’s car production in Shanghai has, for example, been hampered by a shortage of wiring harnesses from a virus-hit supplier, according to Reuters, a news agency.
To increase trade by any amount in these conditions is impressive. But the headline 3.9% expansion reported by China’s customs agency on May 9th was more nominal than real. More detailed statistics, published later in the month, are likely to show that the price of China’s exports rose by perhaps 8% or more in April, compared with a year earlier, according to ubs, a bank. If so, the volume of China’s exports must have shrunk last month.
China's currency just had its worst month ever. It's still dropping (Laura He, CNN)
He, CNN:
The Chinese currency is declining rapidly as the world's second largest economy falters under the weight of Covid restrictions.
Since the start of the year, investors have been moving money out of China, driven by concerns about rising lockdowns in major cities, and Beijing's close ties with Moscow in the wake of Russia's invasion of Ukraine. The links have raised fears that China could be targeted by Western sanctions if it helps Moscow.
The yuan — also known as the renminbi — hit its lowest levels since September 2020 early on Friday [May 13] in the onshore market that Beijing controls as well as offshore, where it can trade more freely.
The currency recovered later in the day to stand around 6.78 per US dollar. In the past three months, the yuan has lost about 7% of its value against the greenback. In April alone, it posted its biggest monthly drop on record. In the same month, China's foreign exchange reserves fell by the most since late 2016.
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On a more upbeat note, do remember that there will be no weekend update next week (Friday 27th) or newsletter the following week (Monday 30th). China Boss is on the way to Paris!
Bon weekend. :)
This is good coverage, it really is scary in China. How do they prolong Covid-zero without huge consequences. Rumor that their leader is not well, just like Putin. https://www.youtube.com/watch?v=7SXHGPiaFUs