The risk of recession is increasing in China. Official figures likely understate how badly China’s economy is doing, while the rest of the world likely understates how badly it would be hit.

China’s economy grew 4.8% in the first quarter, new figures showed on Monday. But that was thanks to particularly strong numbers for January-February, when “March activity plunged across the board,” Nomura notes. Additionally, “we believe real GDP growth could be much weaker than the official data of 4.8% suggests.”

April will be much worse, perhaps the cruelest month, although the extent of the pandemic outside of Shanghai remains to be determined. Beijing’s fight for “zero Covid” is already at an extreme and growing cost, with lockdowns already affecting 40.3% of production.

Although the lockdown of Shanghai’s 26 million people is getting a lot of attention, “we still think global markets are underestimating China’s slowing growth and supply chain stress, which China says us, should trickle down to the rest of the world,” Nomura China Chief Economist Ting Lu and his team said in a note to clients.

There are many doubts about the high numbers at the start of the year, in any case. Official output figures appear “inconsistent” with unofficial counts, as Nomura puts it, or the data “may or may not capture the true degree of loss of growth momentum through the end of March,” economists say. Societe Generale Wei Yao and Michelle Lam. say so politely.

“China’s growth numbers are notoriously susceptible to manipulation,” noted Rory Green, head of China and Asia research at TS Lombard, in its client note. China Fact Check in 6 Charts. “After becoming more reliable over the past two years, 2022 could mark a return to the bad old days.”

Translation: the Beijing government will likely claim to have met its official growth target of 5.5% for this year. It has exceeded its target every year for the past decade, with the exception of 2014, when GDP growth was an inch below schedule “by about 7.5%” – at 7.4%. Achieving 5.5% growth this year seems extremely unlikely, increasing the likelihood of “padding” by provincial and local government officials whose salaries are often based on growth.

There is further evidence of the state of the world’s second-largest economy in the form of the “Li Keqiang Index”. It is a combination of bank lending figures with rail freight and electricity consumption, which helps to better manage at least the factory/physical side of economic production (although it is less precise for attach the activity of the service sector). It is said that Li Keqiang, the Chinese premier, looks at these numbers if he wants to know what is going on.

Lombard says the Li Keqiang index shows a significant slowdown on the manufacturing side. In the services sector, box office ticket sales, holiday tourism figures and passenger air travel all showed a sharp slowdown in March and pre-Omicron variant weakness in February. Official retail sales rose 6.7% year on year in January-February, combined to smooth the Lunar New Year effect, but fell to a 3.5% decline in March, with much worse to come .

Lombard predicts that China’s economy will grow by 4.0% or less this year, but authorities will still claim a 5.0% figure. The independent research house also notes signs of panic in Beijing, with Vice Premier Liu He’s speech in mid-March promising a stimulus and rolling back several landmark initiatives if the quest for ‘common prosperity’ is one of them. example.

China’s economy “most likely” contracted in April (or, in the parlance of economists, experienced “negative growth”), Lu de Nomura said. “Amid expansive shutdowns, logistical disruptions, a downward spiral in the real estate sector and a slowdown in exports, we expect activity data to fall in April and believe that recession risk has increased in the future. second quarter,” he and his team say.

Official figures can be important for investors, even if they are wrong, as they will indicate the degree of official policy response. China on Friday slashed reserve ratio requirements for banks by 0.25%, increasing the amount they can lend, but the stimulus is not yet intense – many market participants were anticipating a reduction in 0.5%.

Another cut in the reserve rate and a drop in interest rates themselves are likely by the middle of the year. The government is also trying to support growth with tax cuts for hard-hit sectors. But the Beijing government has yet to implement the kind of directly pro-market measures that Liu said were coming during his speech last month.

Local government officials are also being judged by Beijing on their success in suppressing Covid-19. This prompts them to perform repeated rounds of mass testing, during which all movement is prevented, as well as setting up barrier upon barrier when truckers or travelers attempt to enter a city.

“The whole political system can be economically efficient when local competition aims to achieve GDP growth, but it can be equally harmful to the national economy when local governments try to minimize the number of coronavirus cases in s ‘insulation’, notes Nomura. The cost could be particularly high in the face of a wave of Omicron, given its surprising contagion, which means that previous measures may be more expensive and less effective to implement.

“The latest outbreak affected almost every economically significant part of China,” Nomura says, with 373 million people in 45 Chinese cities under some form of lockdown, affecting $7.2 trillion or 40.3% of GDP.

Another area where China’s numbers are questioned is in its reports on the extent of its Covid outbreak. On Monday, authorities recorded three Covid deaths, all in Shanghai, all of people over 80 with underlying illnesses. But these are the first deaths recorded in a month, and only nine have been reported in the past two years – barely believable simply by the law of averages when you consider there have been 616,358 Covid cases over the past last month, at least according to Johns Hopkins.

Figures from Johns Hopkins also give a much higher death toll, of 3,740 in the past month and 13,777 during the pandemic, out of a total of 1.8 million Covid cases in China. The death toll would still be low by the standards of many Western countries. But it’s hard to believe that official figures from the Chinese Center for Disease Control and Prevention show virtually no deaths for 2021, and only five in the current outbreak in Shanghai.

China has chastised Hong Kong officials for regularly reporting death tolls, which it said could cause public concern. Again, that could be correct… we can see from the reaction in the form of lockdowns and heightened rhetoric from Beijing that the outbreak is already severe and threatening to overburden the healthcare system.

Equities partly explain the concern. The CSI 300 of China’s largest quotes has fallen 0.5% today and 15.3% so far this year. But China’s outsized impact on global growth and its potential recession is not yet reflected in foreign stocks. Markets seem more concerned about the price of oil and the war in Ukraine.

With China’s ports clogged, tankers stuck along the coast, workers stranded and increasingly urged to move into their factories, sleeping there to live and work inside a Covid ‘bubble’, much worse is likely to come from the Chinese economy in the next quarter. It will take delving into unofficial data and Covid figures to determine just how bad this really is getting, and time to see how far the consequences of China’s shutdown go.

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