China Needs A Confidence Vaccine!

China missed expectations this week when it reported October economic data released by China's National Bureau of Statistics.

Retail sales fell by 0.5% in October from a year ago, the first decline since May and industrial production grew by 5% according to the data released.

Some media reported analysts expected retail sales with slow to 1% year on your growth in October, and that industrial production would also slow to 5.2% growth.

Fixed asset investment for the first 10 months of the year grew by 5.8%, a little bit below expectations for maintaining the same pace as September, with a 5.9% increase year on year.

What's Really Going On Here?

China has continually reported lackluster economic data for most of 2022. Is this a fundamental economic change in the Chinese economy or is there something else going on?

From our perspective, working in several different industries throughout China, we see an increasing crisis of confidence. Simply put, the average consumer is not optimistic about the state of the Chinese economy, are they going to have a job in the future, are they going to have extra income, it's basically not a time to go out and buy a car or an apartment.

On the business side, pretty much the same condition exists. If you are a business owner looking at the Chinese economy today, you are very cautious, not likely to hire new employees, no capital investment, no big new marketing effort or sales drive until you see your stability and recovery on the consumer side.

This is largely being driven by Covid zero. Consumers are afraid to go out, to get caught in a shopping mall and end up in a quarantine facility. Possibly to be quarantined because of a close contact, which frankly nobody really understands what this means in China.?How close is close in a country of 1.4 billion?

On the business side, it's hard to plan your budget when you're not sure that your employees are going to show up because they might get quarantined or locked down, it's difficult to ship products because of logistics and transportation interruptions. It's not possible to visit your global customers because air transportation is not available and quarantine requirements make it excessively expensive both in terms of time and money.

Unintended Consequences Are Real!

Fixed asset investment for the first 10 months of the year grew by 5.8%, below expectations for maintaining the same pace as September, with a 5.9% increase your on year.

Investment in real estate declined further in October, while manufacturing slowed slightly from September. Investment in infrastructure picked up a little bit, to 8.7% as compared to October of last year.

The unemployment rate in cities was unchanged from September at 5.5% while unemployment for younger people ages 16 to 24 was also unchanged at 17.9%. These numbers continue to be record high numbers in modern China.

October’s drop in retail sales dragged down the year to date figure to just 0.6% growth. Home appliances, catering and apparel saw some of the biggest sales declines from a year ago.?The consumer is home!

Car sales held up at 3.9% growth. Online sales of physical goods surged 22% year on year, to account for more than a quarter of retail sales overall.?A clear indication that the consumer is alive and well – but not willing to risk a mall shut down.

However, the data released on Tuesday indicates a general negative turn in trade and domestic demand in October.

Exports in October dropped for the first time since May 2020, while the producer price index fell for the first time in almost 2 years. The core consumer price index, excluding food and energy, showed no change from September with only 0.6% year on your growth October.

Credit data also disappointed, mainly due to the slump in the property market. Home loans for the first 10 months of the year are less than half of what they were one year ago. This is mostly a reflection of the ongoing crisis in the Chinese real estate market, with the developers in or close to bankruptcy.?No one wants to buy a home that is half built.

Recently, the government has announced measures to support the property market, but what kind of support is not exactly clear. Preventing real estate developers from bankruptcy and foreclosure does not necessarily assure consumer confidence.

Government leadership needs to be clear, both in terms of communication and policy in China in order to overcome the byproduct of Covid zero. The days of a command and control Chinese economy are long gone. No matter what one says, that's not going to spur individual business owners or consumers to spend. This is not a crisis of fundamentals but instead a challenge of psychology. Convincing people that you know what you are actually doing means that you have to have a track record of success, something to point to and show – see - this is really working. At the moment that seems to be a challenge.

But China is a dynamic economy and the people of China are smart. China is not going to go away and even though this may be a speed bump on the road to the future, the future is going to be very bright, maybe just take a little bit more time to get there.

From Shanghai.

Alexander Glos