China's Economy Cools Down Significantly. Will the CNY Continue to Depreciate?

Summary:

Under the impact of the pandemic, China's economy cooled down significantly in April, with downward pressure on the economy coming to the fore and the CNY exchange rate continuing to depreciate, but the economy is also expected to improve with the better conditions of the pandemic and policy stimulation.

On May 15, the People's Bank of China (PBOC) and China Banking and Insurance Regulatory Commission (CBIRC) issued a notice adjusting the lower limit of the interest rate for commercial, personal housing loans for the first set of housing. For residential families who take out loans to purchase ordinary self-owned houses, the lower limit of the interest rate for the first set of commercial and personal housing loans is adjusted to not less than the Loan Prime Rate (LPR) for loans of the corresponding term minus 20 basis points, and the interest rate for the first set of mortgage loans shall not be less than 4.4% as measured by the LPR for five years or more released on April 20.

The purpose of this policy adjustment is mainly to support rigid and improved housing demand, which will help promote the stable and healthy development of China's real estate market. But additionally, it also reflects that China's current economic growth is facing a difficult situation, especially since the pandemic in April has caused a relatively large impact on the economic operations. The most direct phenomenon is that due to the shutdown of production in some areas, combined with factors such as supply shortages and rising production costs of raw materials, enterprises, especially small-, medium-, and micro-enterprises, are having more difficulties in their operations, and the effective financing demand has dropped significantly.

The data showed that there was a cross-seasonal decline in social finance and new credit. In April, CNY loans increased by ￥645.4 billion, representing a YoY decrease of ￥823.1 billion, the lowest level in the corresponding period of nearly 13 years. Household loans decreased by ￥217 billion, representing a YoY decrease of ￥745.3 billion. Among them, housing loans decreased by ￥60.5 billion, a YoY decrease of 402.2 billion; Consumer loans excluding housing loans decreased by ￥104.4 billion, a YoY decrease of ￥186.1 billion; Operating loans decreased by ￥52.1 billion, representing a YoY decrease of ￥156.9 billion. In other words, ordinary people begin to repay the mortgage loan in advance, and neither did they consume nor buy a house, nor did the merchants expand their business.

China's economy cools down significantly.

In fact, in addition to the COVID-19 pandemic, China is also facing the challenge of uncertainty in the external environment, such as the Russia-Ukraine conflict and the risk of stagflation in the global economy. According to the latest data from the National Bureau of Statistics of China, downward pressure on economic growth also increased in Q2, with various economic data generally weaker than expected in April.

Increased employment pressure

From January to April, 4.06 million new jobs were created in urban areas all over China, and the national urban survey unemployment rate averaged 5.7%. The employment pressure continued to increase in April, with the urban surveyed unemployment rate rising to 6.1%, the second-highest in history. Among them, the surveyed unemployment rate of the population aged 16-24 and 25-59 was 18.2% and 5.3%, respectively.

China's Economy Cools Down Significantly. Will the CNY Continue to Depreciate?_1

Contracted production

In April, the value-added of industries above the scale dropped 2.9% YoY and 7.08% MoM. In April, the areas with lockdown and shutdown measures due to the pandemic further expanded, which intensified the impact on the circulation of raw materials & labor flow and caused a worse transient pause in industrial production.

From January to April, China's national service industry production index rose 0.3% YoY, down 2.2 percentage points from January to March. April national service industry production index fell 6.1% YoY.

Infrastructure investment fell back significantly

From January to April, the national fixed asset investment (excluding farmers) of China was ￥153,544 billion, up 6.8% YoY, down 0.82% MoM, of which electricity, fuel, water, transportation, and other infrastructure investment fell back relatively more. From January to April, the national real estate development investment of China is ￥3,951.4 billion, down 2.7% YoY, of which the residential investment is ￥295.27 billion, down 2.1%.

China's Economy Cools Down Significantly. Will the CNY Continue to Depreciate?_2

Decline in consumption

Data show that from January to April, the total retail sales of consumer goods are ￥13,814.2 billion, down 0.2% YoY. In April, total retail sales of consumer goods were ￥2,948.3 billion, down 11.1% YoY and down 0.69% MoM. Among them, retail sales of consumer goods other than automobiles are ￥269.16 billion, down 8.4%, and restaurant revenue is 260.9 billion, down 22.7%.

Export slowdown

Most overseas countries follow the USD in the general trend of currency contraction cycle, and production and consumer demand have begun to shrink. As a result, China's foreign export growth has slowed down significantly MoM since this year. From January to February, the YoY export growth fell from 17.3% at the end of last year to 13.6%, slightly stabilized in March, up 12.9% YoY, and narrowed directly to 1.9% in April. Meanwhile, the trade surplus also slowed down.

The average input price of imported goods rose sharply in April, with imports of crude oil, coal, and natural gas decreasing in volume and increasing in price, driving production costs and consumer prices in China. It also brought some imported inflationary impact, with the CPI rising moderately to 2.1% in April.

Will the CNY continue to depreciate?

Recently, together with the slowing economic growth in China, the CNY exchange rate has weakened rapidly against the backdrop of most central banks worldwide following the pace of the Federal Reserve into monetary policy tightening.

In the short term, the CNY is still under pressure due to the continued robust strength of the USD. However, the devaluation of the CNY is also a release of the phased outflow of foreign capital and export pressure. After the devaluation of CNY, on the one hand, export enterprises are expected to obtain more foreign exchange gains; on the other hand, China's export competitiveness will be re-enhanced, especially some export-oriented industries such as light manufacturing will embrace more potential opportunities.

Moreover, under the impact of the pandemic and external factors, the decline in China's economic data in April is within the expectations, so there is no need to exaggerate the conditions and take on pessimistic expectations linearly.

With the pandemic situation in Shanghai and many other places in China significantly contained in May, resumption of work & production and release of lockdown are progressing in an orderly manner. The worst time may have passed, and there will be some improvement on both supply and demand sides. All economic data are expected to rebound from low levels. As China's fundamentals stabilize and rebound, the devaluation of the CNY is expected to slow down. At the same time, as the Federal Reserve accelerates the implementation of its tightening policy, the US Dollar Index may also reach a turning point, and the CNY exchange rate is expected to climb up again.

Of course, China's economy is also under great pressure from an endogenous downturn, with weak consumption and domestic demand. It is probable that foreign exports will decline in the second half of the year. The downward pressure on the economy still exists, which will test the government's efforts and determination to control the economic stimulus policy. At this moment, how to regain confidence may be more important.

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