China’s December Factory Activity Edges Up Ahead Of Economic Headwinds

The PBoC surprised markets on Monday by lowering the interest rate on 700 billion yuan ($153 billion) worth of one-year medium-term loans to some financial institutions by 10 basis points to 2.85 per cent.

The central bank also lowered borrowing costs on seven-day reverse repurchase agreements, or repos, to 2.1 per cent from 2.2 per cent, and offered another 100 billion yuan worth to banks. China uses reverse repos to add to the money supply.

The move coincided with the release of China’s annual GDP data. GDP rose 8.1 per cent in 2021 which was slightly above expectations of 8 per cent. Growth was 4 per cent year-on-year in the final quarter of the year but was better than analysts’ consensus forecasts of 3.6 per cent.

However, some economists said the data was too good to be true and was inconsistent with official monthly data, which pointed to slower quarter-on-quarter growth than earlier in the year.

Capital Economics said its China Activity Proxy, an in-house alternative to China’s official GDP data, indicated the Chinese economy stagnated in the fourth quarter following a contraction in the third quarter.

“We are sceptical that this reflects the reality on the ground ... with the property sector still struggling and virus disruptions becoming more frequent, economic momentum is likely to remain weak throughout much of this year,” Capital Economics Senior China Economist, Julian Evans-Pritchard, said.

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A spate of COVID-19 outbreaks in Chinese cities over the past fortnight has raised fears it will take further heavy-handed measures to try to contain the highly contagious omicron variant. The Omicron variant has now been reported in five cities and measures in place to control its spread are becoming stricter in the lead up to the Winter Olympics, which starts on February 4.

 

China’s National Bureau of Statistics annual data dump underscored China’s economic resilience, particularly in the first half of the year, despite almost two years of global disruptions caused by the COVID-19 pandemic. Economists said it was unlikely that could continue in 2022.

“Widespread lockdowns to quash the latest outbreaks will drag on growth in the first quarter, although that will be offset by resilience in the housing sector and some relaxation of the decarbonisation push,” Barclays’ Chief China Economist Jian Chang said.

On a quarter by quarter basis the Chinese economy only grew at 1.6 per cent in the fourth quarter following a spate of COVID-19 outbreaks which forced the closure of some factories, ports and airports as authorities sought to contain the virus.

China’s property sector is the other main area of concern as developers like Evergrande struggle to repay interest on huge loans.

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Surprise rate cut

The Chinese government last month pledged to maintain stability, which is being reflected in central bank moves to ease interest rates at a time when many western countries are moving in the opposite direction.

The monetary stimulus took markets by surprise on Monday. The Hang Seng was 0.6 per cent lower ahead of the close in Hong Kong, while the CSI 300 index of mainland Chinese shares was up 0.9 per cent.

The Australian dollar, which is often used as a liquid foreign exchange market proxy for Chinese growth, fell 10 basis points on the China data when it was released at 1pm (AEDT) to US71.96¢, but it recovered quickly to US72.07¢. Australian shares rallied late in the session on track for a gain of 0.4 per cent despite commodity producers being in the red.

China’s annual GDP data highlighted the shift in the country’s post-pandemic recovery in the first half compared to the weaker second half.

GDP growth jumped 18.3 per cent in the first quarter off a weak corresponding period the previous year, and increased 7.9 per cent in the second quarter.

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It slowed to 4.9 per cent in the third quarter before hitting 4 per cent in the fourth quarter.

Retail sales rose 12.5 per cent for the year but declined dramatically towards the end of the year, with a 1.7 per cent increase in December, as the threat of COVID-19 outbreaks sapped confidence.

Fixed asset investment rose 4.9 per cent in the year. A breakdown of the data showed a sharp slowdown in infrastructure spending, something that traditionally fuelled demand for Australian iron ore, to 0.4 per cent. Manufacturing investment rose 13.5 per cent for the year.

The Chinese government said its unemployment rate was 0.5 percentage points lower at 5.1 per cent in 2021.

China on Friday posted stronger-than-expected trade data. It said imports from Australia jumped 40 per cent last year to $US164.8 billion ($226.4 billion) because of rising commodity prices, but are expected to slow this year.

Source : https://www.afr.com/world/asia/china-seeks-stability-with-stimulus-shock-as-omicron-cases-rise-20220117-p59otq

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