China Resumes Reopening

Investors got a fresh dose of Chinese economic data overnight Monday, this time with the official Purchasing Managers’ Indexes (PMIs) signalling continued contraction in May.^[i] The rate of decline eased significantly from April, but it still doesn’t point to growth.^[ii] That is what we consider to be the bad news. The good? Shanghai is lifting its lockdown, and life there started returning to a semblance of normal on Wednesday.^[iii] Beijing also reportedly eased some curbs over the weekend.^[iv] Local officials in Shanghai have also announced a raft of economic measures to help support a rebound.^[v] Now, we don’t think any of this points to a rapid acceleration in Chinese gross domestic product (GDP, a government-produced measure of economic output) growth—but we also don’t think that is necessary for Chinese or global stocks at this point. Rather, we think the combination of reopening and targeted fiscal and monetary assistance is likely to help reality turn out better than the deeper malaise commentators we follow warn of—a positive surprise, in our view.

PMIs are what those who love economic jargon call soft data. They don’t report growth rates of actual output, which would be considered hard data. Rather, they are surveys measuring the percentage of businesses reporting increased activity in a given month. Readings over 50 indicate expansion and under 50 contraction—with growth and/or contraction theoretically getting faster the further readings get from 50. So from that technical standpoint, China’s May PMIs appeared to show some signs of stabilisation. The official manufacturing PMI rose from 47.4 in April to 49.6—still shrinking, but barely.^[vi] The sub-index for large manufacturers even rose to 51.0, returning to growth.^[vii] The non-manufacturing PMI, which includes the increasingly important services sector, jumped from April’s 41.9 to 47.8, with most of the increase coming from forward-looking new business.^[viii] Note that these signs of stabilisation arrived despite some of China’s main economic hubs reportedly remaining under strict COVID restrictions, which we think points to some underappreciated resilience.^[ix]

In our view, it also sets the baseline for what comes next for China’s economy, as those restrictions come to an end in Shanghai. Starting on Wednesday, people in areas of the city deemed “low-risk” based on COVID case tallies can leave their house for more than a few hours at a time.^[x] They can return to work. They can use public transit. Those who have slept at work due to the severe restrictions on movement can finally return home.^[xi] Indoor dining will remain banned, but shops will be able to operate at 75% capacity.^[xii] Now, this isn’t a full return-to-normal, as frequent mandatory testing persists and we don’t see any indication that China’s federal government has abandoned its zero-COVID aims.^[xiii] It is possible a resurgence in cases could bring some restrictions back. But for now, we think local government officials’ relaxing COVID policies should help enable an economic recovery.

This applies only to Shanghai, mind you—other regions have reportedly been under varying degrees of lockdown, but there isn’t much information available internationally on the extent of their measures or when they will lift.^[xiv] Beijing started rolling back citywide restrictions this past weekend, with shopping malls and parks allowed to operate. But China has had rolling lockdowns in less economically important metro areas for the better part of two years now, and it took measures in the biggest cities, like Shanghai, to flip headline national economic data (e.g., retail sales and industrial production) negative.^[xv] So to us, that is a strong indication that Shanghai and Beijing easing restrictions is likely to have a similar but positive effect on the data from here.

To help speed things along, Shanghai officials announced a suite of economic support measures over the weekend.^[xvi] These include targeted tax cuts, accelerated property development approvals, speeding infrastructure development, boosting high-tech manufacturing and assistance for local businesses. This comes on top of national measures including small tax cuts, modest monetary stimulus, stepped-up support for lending and infrastructure and more flexibility on debt issuance.^[xvii]

All told, it isn’t the massive wall of stimulus officials deployed after 2008’s global financial crisis, but we don’t think it needs to be.^[xviii] For the past two years, China and the world alike have shown that simply ending restrictions is all it takes to generate a swift rebound.^[xix] Moreover, we think bigger national stimulus would likely be of little use whilst lockdowns persist in other areas. More beneficial, in our view, would be to add targeted measures as other cities reopen. We think that seems likely, considering officials’ public statements indicate lockdowns’ economic impact is of increasing concern.^[xx] In our view, reopening, coupled with modest fiscal and monetary support, is likely to sufficiently set up China’s economy for a decent rebound and full-year economic growth. It may not be rapid, but given how low financial commentators’ expectations have sunk, we think modest growth will likely be enough to help instill confidence that the hard landing observers we follow warn of isn’t here for China’s economy, easing one of investors’ major early-2022 uncertainties.