China: Poor November data, bumpy exit from Zero-Covid ahead

China Macro: November data confirm further slowdown

In line with consensus expectations including ours, China’s activity data for November confirmed a further economic slowdown, reflecting headwinds from the pandemic, problems in real estate and cooling global demand. Still, the data came in even weaker than was already anticipated. Annual growth of industrial production slowed to a six-month low of 2.2% yoy (October: 5.0%, consensus: 3.5%). The annual contraction in retail sales deepened to -5.9% yoy (October: -0.5%, consensus: -4.0%), with residential property sales (-28.4% yoy) not showing any signs of improvement yet. Fixed investment also slowed further, to 5.3% ytd (Jan-Oct: 5.8%, consensus: 5.6%), with the annual contraction in property investment deepening again (-9.8% ytd versus -8.8% in Jan-Oct). Meanwhile, the surveyed jobless rate rose to 5.7% (October: 5.5%, consensus: 5.6%). Earlier this month, PMIs and foreign trade data pointed in the same direction, with only lending data showing some improvement following a seasonal dip in October. All in all, Bloomberg’s monthly GDP estimate dropped by two full points in November, to 3.1% yoy (October 5.1%), the weakest reading since the broad lockdown slump in April/May of this year.

Acceleration of Zero-Covid exit may get bumpy

Over the past weeks, we have seen a remarkable shift in China’s Zero-Covid approach. After a sharp rise in cases and a broadening of lockdowns seen in October/November, unprecedented protests broke out in late November. Although Beijing quickly stepped in to contain these protests, they (next to other factors such as a weakening economy) seem to have increased policymakers’ sense of urgency regarding an exit from Zero-Covid. Both central and local authorities have eased testing and quarantine policies significantly, while putting more focus on making progress with vaccinations. With herd immunity still a distant prospect, the key to engineer an orderly exit from Zero-Covid is boosting the vaccination of the elderly. Moreover, we have seen a shift in the official narrative needed to prepare the population for a different approach. In practice, however, acceleration of the Zero-Covid exit already seems to contribute to a further increase in the number of people being infected. This could overwhelm hospital and IC capacity and lead to a sharp rise in the death toll (which has been extremely low so far due to Zero-Covid). Notably in this respect is the delay of the Central Economic Work Conference, traditionally held each December in Beijing, allegedly due to a rise in cases leading to an overcrowding of hospitals in Beijing and a shortage of drug supplies. All in all, we deem the risk of a more disorderly exit from Zero-Covid high, with a bigger impact on public health and/or confidence and behaviour that may backfire on the economy, and lead to renewed disruptions to both the supply and demand side (see our views on the Chinese economy in our 2023 Outlook here).