The publication of China GDP 1st quarter figures, +4.8%, year-on-year, has been received with skepticism, when they were higher than the 4% increase, still year-on-year, on the previous quarter and even above the expectations which were based on a 4.4% growth. The war in Ukraine had just started and had not yet significantly affected the supply chains and the restart of the covid-19 pandemic was hardy beginning to produce its effects with the confinement decided in the Shenzhen area.
Enterprises investments has grown by 9.3% on annual rhythm and industry and power and heat productions increased respectively by 6.2% and 6.1%. High-tech sectors and electric vehicles production have been the main engines of this growth with sometimes double-digit increases. But these progressions conceal the beginning of the turnaround occurred in March with the fall of imports and the measures taken to fight against the come back of the pandemic with the Shanghai area confinement, partial at the start of March and which has been strengthened since April 1st. Well, the city is the first harbor of the Middle Empire and the pictures showing hundreds of container ship waiting to be loaded or unloaded rightly show the economic consequences of the decisions taken by the Chinese authorities. Supply chains have also started to suffer the consequences of the closing of the railroad lines with Europe after the invasion of Ukraine by Russia.
One of the most hardly affected activity is the traditional car industry. 20% of the vehicles are produced in the zones currently in confinement and producers like Tesla or Volkswagen have had to interrupt their activity, which has had repercussions on their suppliers. Even if a progressive comeback of the workers in the plants has just been decided, we are far from having recovered normal conditions of work. The production of the branch forecast of 27.5 million vehicles in 2022 has not yet been revised down but it is very low likely that it will be reached. The softening of the restrictions which affect producers do not concern clients who, them, will not be at the meetings in the car agencies because their moves are still always restricted. This situation is not limited to the cars and we already observe falls of luxury products and of some foods sales.
These threats are coming when another important sector of the Chinese economy is going through difficult times, the real estate. The most important Chinese property developer, Evergrande, under the threat of default due to its excessive indebtedness, seems, until now, to have been saved by a State intervention. But the rebound of the sanitary crisis has had an immediate effect on the building activities with home sales coming back in March at their lowest level for two years. This trend has all the chances to worsen in the coming months, the potential buyers, when they are not in the impossibility to visit the properties, are tempted to delay their projects until the coming back to a normal sanitary situation.
So, the economic trends observed in March would become stronger during the 2nd quarter and some are starting to worry about a possible recession if, for instance, similar dispositions were decided to protect the populations in other major cities like Beijing or in Yunnan and in Sichuan. Financial markets have quickly reacted with very heavy falls of Shanghai and Hong Kong stocks markets, respectively -20% and -15% since the beginning of the year. This context has incited the China Central Bank to become more accommodative through the reduction of the mandatory reserve ratios of the commercial banks, which will free more financing capacities for enterprises of 83 billion dollars to allow to these ones to going through the difficult coming period, a little like what has been put into place in Europe with the “whatever it costs”.
But that action which probably foreshadows other ones is coming at a time when in the United States, the Federal Reserve is preparing itself, due to the strong inflation rebound, to act in the opposite direction through increasing its interest rates. The China market had profited until now with a spread which was making Chinese bonds more attractive. The current turnaround on the bonds markets has generated during February and March capital exit of 28 billion dollars to which must be added sales of shares owned by foreign investors for near 8 billion dollars. The two countries opposite monetary policies have also had consequences on the currencies markets. When the Yuan-dollar parity remained stable for a year, around 6.36 Yuan for one dollar, the Chinese currency fell these last two weeks by 3.5%.
Until now, China, despite the commodities prices increase, has successfully limited its repercussion on household. The consumer price index has risen by 1.5% year-on-year when production prices have increased by more than 8%. The country has not hesitated to reduce some customs tariffs to offset the increasing cost of its imports, especially these coming from the U.S. That relative softening of the price evolution is also the consequence of consumers worry who hesitate to buy or who are in the impossibility to go shopping in several large cities where it is there that can be found the highest levels of life and so the expenses.
China did adopt two strategic targets to start a new phase of its development: to feed more the economic growth with its internal demand and to make its currency, the Yuan, a true reserve currency. The restrictions of the travels in the big cities have already weighted on the household behavior and are even able to provoke during the second quarter an economic recession as the one the country has known at the beginning of 2020 at the start of the corona virus pandemic. The addition of the worries about growth and of the opposite evolution of the American and Chinese monetary policies have affected financial markets. The Yuan internationalization process, due to the retreat of foreign investors, will be slowed. These two objectives will become more and more difficult to achieve.
At the opening of the Boao Forum, which is for Asia a little like the Davos Forum is for Western countries, the president Xi Jinping has insisted on the point that in order to overcome the challenges the world is confronted with, the best solution was in the cooperation and in the solidarity between nations and not in the resurgence of the Cold War mentality. Asia might become a model about the world peace, about the support to growth and to favorizing the international cooperation.
This message could have been well received before the rebound of the pandemic in China where growth had contributed to support the world economy. But it is less convincing if the difficulties to which the country is confronted with are generating a new risk on the world economic and financial equilibriums.