Letter From Shanghai No 1036 - The Jack-in-the-Box

This morning at 9:45 am, we had the privately sourced Caixin Manufacturing PMI for January (actual 49.2, previous 49.0, expected 49.5), which, as it remains in contraction, is unable to confirm the buoyancy in yesterday’s official NBS PMI data. One might expect firmer numbers to cause enthusiastic hedge fund managers to load up on commodities, expecting a drawdown in physical stocks as we go forward into the year. However, PMIs are similar to sentiment indicators and essentially ask the question, is the current month better than the last month? Well, in China, the obvious answer would be yes; indeed, considering the Chinese exit from Covid, it would be impossible not to be. So this morning’s Caixin number, still in contraction at below 50, is somewhat disappointing. It is at this point I would like to return to an issue mentioned in yesterday’s letter, in that we must discount those recent numbers detailing rising car, rail, metro and plane journeys and differentiate between an appetite to travel to see family during CNY following three years of prohibition and the return of Chinese consumer confidence as two separate things.

Indeed, slightly below the radar was yesterday’s inspection visit to the People’s Bank of China and its sister, the State Administration of Foreign Exchange, by Li Keqiang, who then hosted a symposium entitled “Increase financial support for expanding domestic demand and optimising structure”. Such visits are no doubt intended to sharpen the focus of the PBOC and SAFE, and its recipients are left in no doubt of the requirements of the Politburo.

Certainly, to maintain social harmony, Beijing has few choices but to move from Covid de-risking to growth. To achieve this year’s as yet unpublished GDP target, Chinese consumer demand must be restored, and to do that, consumer confidence must be restored also, and that will not suddenly appear like a jack-in-the-box following CNY but is a work in progress.?

I would like to refer back to my letter no 1024 – The Unspoken Driver of Policy, in which I noted: “History will probably judge the three years of zero-Covid as merely an intermission in the progress of the country. But history will be less forgiving as to the decline of the birth rate and the complications that it delivers in the years ahead. The birth rate, which was already falling, has slumped during Covid and poses huge questions. Construction has been perhaps 40% of the Chinese economy and has been the go-to policy in times of economic stress, but now, construction, who is it for? If you think the total population of China may fall 30% in the next 60 years (420m), why build more houses? Land sales, which have underpinned city and regional finances for the last 40 years, may have to endure some dark days.” I mention this as the front-page article in the New York Times yesterday outlined that China is making in vitro fertilisation for couples struggling to have a baby available through the health system. Previously available privately, the process, which can cost several thousand dollars per round, will, in future, be partly funded by the state. But this is perhaps a periphery policy. Beijing has a long way to go to encourage young couples to have the confidence to start a family; for the moment, “double income, no kids” is the way to go.

Best regards,

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John