Stimulus, stimulus, stimulus! Regarding China, conventional Western wisdom fixates on government stimulus — and worries that much more is necessary to rev up the middle kingdom’s economic engine. Many bemoan that the tens of trillions of yuan pledged this year still pale in comparison with 2020’s measures — let alone 2008’s sweeping financial crisis aid. Some have even called for direct payments to consumers. What they miss is that the Chinese economy doesn’t need that much help now. Re-openings will provide all the juice needed to get businesses humming again, provided another round of new Covid outbreaks doesn’t interfere. Here is how to see the overlooked bullish reality few outside China can fathom.
The emergency restrictions enacted to control Covid-19 outbreaks are, unfortunately, punitive. They temporarily pinch the economy, hard. The data supports what you have seen with your own eyes. In April, retail sales tumbled 11.1% year-on-year amid shop closures in Shanghai and Beijing. Industrial production sank 2.9%. Purchasing managers’ indexes (PMIs) showed both the services and manufacturing sectors contracting in March, April and May. Covid restrictions — combined with the government’s efforts to curtail real estate market excess — sent April’s residential building purchases tumbling 32.2% year-on-year. Spending on commercial buildings was 29.5% lower, furthering fears of a Chinese property market collapse.
Despite this, I maintain that too many Western observers extrapolate recent weakness far into the future, ignoring one of the past two years’ chief economic lessons: Brief setbacks tied to Covid restrictions have reversed with reopenings — fast! Restrictions’ impacts are short-term, not sclerotic. Consider 2020, when activity in Wuhan and much of Hubei province was limited. In the first quarter of 2020, Chinese GDP plunged 6.9% year-on-year. But as pandemic rules lifted in late March and early April, GDP flipped positive in the second quarter, rising 3.1% year-on-year. That may seem tepid, but remember: Year-on-year growth then looked back to the second quarter of 2019 — pre-pandemic — and was dragged down by the first quarter’s contraction.
The National Bureau of Statistics’ seasonally adjusted data show GDP swooned 10.5% quarter-on-quarter at the start of 2020, then rebounded 11.6% in the second quarter. Industrial production turned positive that April, too, rising 3.9% year-on-year. It accelerated through year-end, reaching 7.3% by December 2020. Service sector PMIs — which plummeted to the lowest level on record in February 2020 — quickly rebounded in March, starting an uninterrupted 17-month expansion.
It isn’t just China. Since Covid’s arrival coupled with lockdowns, sharp swoons and fast turnarounds have been a global phenomenon, with restrictions’ lifting the fulcrum. America’s 2020 emergency measures and reopening lagged China’s by a few months, but its turnaround happened in parallel. In the second quarter of that year, U.S. GDP growth plunged 8.9% amid widespread limits on commerce and gatherings. Summer brought relaxed restrictions — and a 7.5% third quarter GDP surge. Shops and restaurants suffered early in the outbreak, with many forced to close. Hence retail and food services sales tumbled 8.7% month-on-month in March 2020 and another 15.2% in April. But as reopenings arrived, they boomeranged back, rising 18.7% in May and 8.7% in June. By quarter two of 2021, U.S. GDP had recouped all ground lost during 2020’s huge but lightning-quick contraction.
The eurozone? Different continent, same experience. The bloc’s GDP tumbled a quarterly 3.5% in the first quarter of 2020 and 11.7% in the second quarter, as restrictions halted activity. Reopening began in the third quarter, turbocharging GDP 12.8% higher. It cooled amid renewed restrictions that winter but boomed when those eased, too.
Relaxed restrictions’ biggest winners: service firms. In the U.S., companies are reporting surging spending on travel and leisure services, now that America has dropped omicron restrictions. Gauges measuring air passenger traffic, restaurant reservations and hotel occupancy also show services booming despite higher prices.
Since many eurozone members lifted restrictions in March, PMIs have shown service sector growth surging there, too — suggesting the region’s broader economy is muddling through better than expected despite stiff energy headwinds from the Ukraine war. In Canada, GDP attributable to the service sector fell 0.5% month-on-month this past January when Ontario — its biggest province — shuttered restaurants, gyms, theaters and more amid omicron’s rise. When restrictions eased in February, it all snapped back.
Service sectors’ super-swings make perfect sense, given restrictions’ greater impact on them. Most countries issuing Covid rules have made exceptions or adaptations for manufacturers to continue production, even if it is with limitations. But restaurants, movie theaters, brick-and-mortar retailers and other service firms typically face far stiffer limits — or even outright closures. When restrictions lift, their doors open and customers return — unleashing pent-up demand.
You are already seeing this. China’s nonmanufacturing PMI sank to 41.9 in April — far below the 50-point reading delineating expansion from contraction. It jumped to 47.8 in May — signaling a milder contraction and representing the biggest one-month rise since March 2020 as firms saw reopenings ahead. Complete normalcy won’t return overnight. You don’t need me to tell you that. Reopenings worldwide have shown it can take time to sort out supply chain disruptions, rebuild inventory and reassemble work staffs. Flare-ups spurring tightened restrictions in some Shanghai neighborhoods also show the path to full reopening won’t be a straight line. But recent history shows the broad economic rebound will be stronger and quicker than pessimists claim.
That isn’t just good news for China’s economy. Its stocks should benefit, too. Remember: Stocks don’t require perfection to rise. They only need reality to outstrip expectations. Presently, many envision a long, jagged slog of a rebound ahead — especially without additional stimulus. That leaves plenty of room for positive surprise — stock market rocket fuel.
None of this means the Chinese government’s already approved stimulus efforts won’t help. Sweeping tax rebates and deferred social security and loan payments all help firms weather Covid’s turbulence. Nearly 40,000 small businesses had received rental relief as of June 6 — crucial benefits. Cuts to the loan prime rate, meanwhile, should stoke lending — helping some companies hang on through short term struggles while providing others fresh capital to drive growth. These, plus other measures, should help stabilize real estate, too. All of that is good! But growth’s resumption isn’t reliant on massive stimulus. The current targeted measures are sufficient. More won’t hurt — but the key is reopening and keeping the virus at bay. Doing that will facilitate a faster and easier recovery than almost anyone envisions. Look to that time now — and own Chinese stocks before it arrives.
Ken Fisher is the founder and executive chairman of Fisher Investments.
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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