We downgraded our 2022 China GDP growth forecast to 4.2% from 5% on April 18 on the Covid shock, especially widespread logistics delays, production suspensions and notable damage to consumption and service activities. Based on our UBS China Activity Tracker and high frequency data monitor, we pulse check China's economy to examine the latest Covid impact.
The latest omicron wave has likely peaked, Shanghai’s lockdown continues, mobility restrictions have tightened. China’s daily number of new confirmed cases and asymptomatic infections likely peaked in mid-April, and now is trending downward at a slow pace. Although the number of medium- to high-risk areas has dropped notably, de facto mobility restrictions tightened in many areas in April, including the Shanghai lockdown since end-March. And some other cities have implemented de facto soft lockdowns for several weeks once a few new Covid cases were confirmed.
On the positive side, Shenzhen has successfully put down its latest omicron wave after a week-long lockdown in March and been normalizing rapidly, and new cases in Jilin province have declined notably to under 200 after strict lockdowns and mass testing.
Passenger turnover and traffic have still seen sharp declines in recent weeks. The larger decline of various forms of traffic indicators in cities suggests that offline services — especially travel, retail, entertainment, lodging and restaurants — will likely weaken more in April than in March.
For instance, the 100-city average transport congestion index dropped sharply in early April to below 2021 levels, while it rebounded a bit in the past week. Shanghai’s subway passenger turnover declined from an average of over 10 million in early March to almost zero in April. Meanwhile, subway passenger turnover in nine other large cities in April also dropped 31% from a year ago, significantly weaker than the 18% year-on-year decline in March. Subway passenger turnover has weakened further in the last two weeks, with that in 10 large cities (including Shanghai) dropping by 41% in the first week of April and by 46% and 49% in the following two weeks, indicating a widespread tightening of mobility restrictions.
Meanwhile, local movement intensity (within a city) from the Baidu Qianxi database also weakened in April, while the inter-region movement index slid to a level even lower than 2020. In addition, Covid restrictions also hurt auto sales significantly, with auto retail sales declining by 35% year-on-year in the first two weeks of April (vs -15% year-on-year in March). We continue to expect China’s overall retail sales to decline much more steeply in April than in March, while service activities that are included in retail sales statistics may weaken more sharply.
Disruptions to logistics and supply chains may have eased marginally recently. Many local governments tightened mobility restrictions, erected road barriers, closed highway exits, and increased testing and quarantine requirements for truck drivers, disrupting logistics, transportation and supply chains especially in the Yangtze River Delta region.
The State Council’s command that local governments unblock transport and logistics is starting to kick. The number of closed toll stations dropped sharply from 678 on April 10 to 116 on April 18 and 10 on April 24. Although the full truck load (FTL) freight traffic index declined by 27% year-on-year for China on average in the first 24 days of April (vs -3% year-on-year in March and +6% year-on-year in January-February), the year-on-year decline narrowed slightly in the past 10 days (-27%) from the worst week (-29% year-on-year) of April 8-14.
In addition, the year-on-year decline in package throughput index of key express enterprises also narrowed in the past 10 days. In particular, the FTL index in Jiangsu (a neighboring province of Shanghai that was badly hit by the logistics disruption) improved from -43% year-on-year in the second week of April to -38% year-on-year during the past 10 days. So did Fujian province (from -40% year-on-year to -33% year-on-year) and Jilin province (from -84% year-on-year to -79% year-on-year). That said, the FTL index in Shanghai stayed in deep contraction of 85% year-on-year, echoing a continued lockdown.
Nevertheless, the diminishing of disruptions in logistics and supply chain has been slow, and it may take another several weeks to see more significant progress. Although factories may operate in a “closed loop” environment (as some did during Shenzhen lockdown in March), shortage of inputs and delays in output delivery have led to production disruptions in Shanghai and some nearby cities, affecting automobile production and some other industries.
Heavy industrial production may have been affected much less than industries with complex supply chains (like cars, electronics, machinery, etc.), as operating rates of steel furnaces increased and steel production in the first 20 days of April narrowed the year-on-year decline from March. Overall, industrial production likely weakened much more notably in April than March, and further reshuffle of international orders could lead to lasting weakness in the second quarter.
Exports may have also been dampened modestly. As disruptions and delays in logistics, transportation, and production due to Covid restrictions were more widespread in April than March, especially in the Yangtze River Delta region, this may have affected China’s trade activities more meaningfully in April.
For instance, China’s foreign-related cargo throughput in key coastal ports declined by 2% year-on-year and 5% year-on-year in the first and second 10 days of April, respectively, weaker than the 0% year-on-year change in March. Foreign-related container throughput in eight key ports decelerated to +5% year-on-year in the first 10 days of April and -4% year-on-year in the second 10 days, compared to +6% year-on-year in March. For Shanghai port (26% of China’s total exports and imports), its daily average container throughput declined by around 19% year-on-year in April from 5% year-on-year growth in March. Such decline in April has been much less than the FTL freight in Shanghai, thanks to the Shanghai port reshuffling more container traffic from roadway to waterway (accounting for over 50% of total traffic) and the government’s targeted dispersal for port logistics disruptions.
In contrast, freight throughput in the Pearl River Delta region may have improved. That said, it is still unclear how quickly supply chains and logistics could get back to normal, and how this might affect future external orders and supply chain shifting out of China. As Korean exports in the first 20 days of April stayed strong with a 17% year-on-year rise despite a high base, the recent weakness of China’s trade activities may have been mainly weighed on by the omicron shock.
Property sales declined more and the land market stayed subdued. Tighter Covid restrictions likely also weighed on property sales, as households cannot visit property projects or make home purchases as conveniently as before. The latest Covid wave may have eroded household confidence and increased future uncertainties. China’s 30-city property sales saw a deeper decline of 57% year-on-year in April than the 47% year-on-year drop in March, with tier-one cities leading the weakness likely due to Shanghai lockdown.
Meanwhile, local land market stayed subdued as property downturn escalated again in March and April. The 100-city land sales volume dropped by 43% year-on-year in April, even weaker than the 38% year-on-year decline in March, although the land transaction value narrowed its decline thanks to higher average land prices. The average land auction premium rate stayed low at 2-3% in April, indicating weak market sentiment.
We predict no quick shift to “zero-Covid” policy; future fine-tuning is possible but uncertain. The government doesn’t appear to be getting ready to adjust the current zero-Covid policy in the coming months, with containing the latest omicron outbreak staying the top policy priority, although the economic and social costs of Covid restrictions have been rising rapidly in April.
We continue to think that the government may fine-tune its Covid policy gradually if public resistance is too strong, the economic downturn is too steep, the vaccination rate among the elderly picks up to a high level (51% with two jabs and 20% with a booster for age 80+ in March), and Covid-related death and severe cases stay low (192 deaths vs 652,289 new symptomatic and asymptomatic infections, year-to-date 2022). That said, we are not sure when and how this change could be triggered, which remains the biggest macro uncertainty for China.
Wang Tao is the head of Asia economics and chief China economist at UBS Investment Bank.
The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.
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