• Consumption Trends – Retail sales growth turned negative in March, and a deeper drop is anticipated for April. Labor market weakness is pronounced, reflected by rising unemployment rate and slow job creation. These trends won’t be quickly reversed. Without major policy incentives to reboot household consumption, subdued retail growth will likely persist throughout the year.  Elevated fuel prices and rising food prices will necessarily weigh on consumer sentiment and deter household expenditure on non-necessity goods. 

• Trade Trends – Chinese export growth slowed modestly in Q1, but the outlook is deteriorating quickly as the Ukraine crisis dampens global growth and COVID disrupts China’s industrial production and shipping. Surging prices saw China’s demand for imported commodities collapse in February and March. Weakening economic growth and rising US rates are working together to bear down on the RMB.

Implications for Business

Growth challenges for China have been mounting continually since the housing market slump began in 2H 2021. The Ukraine crisis has stoked inflationary pressures and exacerbated supply chain problems not fully resolved from the initial waves of the pandemic in 2020. The current COVID resurgence has upended consumption growth and disrupted production. Downward pressures on the RMB – a function of weakening growth expectations and rising US rates – see capital outflows increasing markedly. Capital outflow pressures can limit the headroom for monetary loosening. In addition, COVID lockdowns may curb infrastructure construction activities, hindering the effectiveness of fiscal spending stimulus. It’s a tough choice between zero COVID and economic rescue. 

As of yet, the bottom isn’t in sight. The two datapoints most likely to indicate a bottom will be 1). When new home sales stop falling; and 2). When long-term corporate loans pick up. Both indicators will have to show several months of positive directionality for a bottom to be considered established.