China’s Cautious Economic Reboot Is a Warning for the World

(Bloomberg) -- China has a lesson for the world: An economy is harder to reboot than it is to shut down.

Fresh data for the month of April, covering a period when the government pushed hard to reopen the economy as the coronavirus came under control, show that retail sales continue to fall as consumers shun restaurants and curb spending on other non-essential items.

While factory output rose for the first time since the virus struck and state investment improved, private investment remained anemic. Worryingly for manufacturers who are already battling deflation and a slump in global demand, inventories are stacking up as supply outstrips demand.

The data underscore that China’s economic recovery will be gradual, with little sign of the kind of snap-back some had expected when the crisis began. It also suggests a revival led by supply will create excess capacity and disinflation unless demand soon catches up -- both at home and abroad.

“Unlocking the economy is a more challenging and complex task than locking it down,” said Chua Hak Bin, a senior economist at Maybank Kim Eng Research Pte. in Singapore.

China’s experience is sobering for governments seeking to ease virus-related curbs in the hope of offsetting the deepest recession in decades. Policy makers including Federal Reserve Chairman Jerome Powell and International Monetary Fund Managing Director Kristalina Georgieva have warned that recovery is still a way off.

Some signs of China’s recovery -- especially in production -- could be seen in a sweep of data released Friday that showed industrial output rose a better-than-expected 3.9% from a year earlier, reversing a drop of 1.1% in March and a deep slump in the first two months of the year. Fixed-asset investment decreased 10.3% in the first four months, a smaller decline than the 16.1% drop in the January-March period.

Retail sales slid 7.5% though, more than the projected 6% drop, as shoppers preferred to avoid crowds and instead move their purchases online. Restaurant and catering receipts slumped by 31.1% from a year earlier, after a 46.8% collapse in March.

What Bloomberg’s Economists Say...

“It will likely take a long time for activity to get back to relatively normal levels. In the case of China -- where the government can exercise considerable control over industry -- it took six to eight weeks for production to approach pre-pandemic levels, and it’s taking much longer for services and private consumption to recover.”

--Chang Shu

The tick up in inventories adds weight to fears that the redound in industrial output will run into a ceiling if demand continues to lag. A build up of goods would hamper any recovery in manufacturing and ultimately drag on the wider economy too. An index of inventories rose to 49.3 in April, up from 46.1 in January.

More goods and less demand is also deflationary -- not just for China but also the world as those price signals transmit around the globe. That was evident on Tuesday, when data showed factory prices declined a greater-than-expected 3.1% in April.

Credit data on Monday suggested the cash is flowing as aggregate financing increased by 3.09 trillion yuan ($436 billion) last month. If sustained, that type of credit growth should eventually generate a revival in economic growth too -- and yet more debt that’ll hang over longer term prospects.

While hard to compare to the jobs destruction seen in the U.S., there was more evidence China’s labor market is worsening. The surveyed urban jobless rate -- a partial read of the total workforce -- nudged up to 6% from March’s 5.9%.

Worries about uncounted job losses among migrant workers and ongoing signs of stress in the services sector, which employs almost half of all workers in China, suggests more government support for the economy will be needed. The National People’s Congress, China’s rubber-stamp parliament, is set to meet next week where it will map out the government’s economic plan for the remainder of the year.

“Concerns about the jobs recovery in the service sector may be convincing China’s policymakers to steadily turn up the dial on stimulus,” said Shaun Roache, APAC Chief Economist at S&P Global Ratings.

Even as China gets back to work, fears of another wave of the virus are acute. President Xi Jinping called for strengthened controls in the northeastern provinces as a growing cluster of infections near the Russia and North Korea borders threatens to become a second wave.

“The lesson is that reopening doesn’t mean a jump back to the pre-Covid levels,” said Iris Pang, an economist at ING Bank in Hong Kong.

©2020 Bloomberg L.P.

With assistance from Bloomberg