China’s Economy Is Showing Increasing Strain From the Covid Tsunami

China's economy continued to slow in December as the massive Covid-19 outbreak spread across the country and more people stayed home to avoid getting sick or to recover.

There was a contraction in activity in December from an already weak pace in November and the outlook is grim for the new year.

It had reached every province before the end of regular testing and there was no reliable data on the extent of the spread of the virus. The virus can circulate without restriction now that almost all domestic restrictions have been canceled.

China's economy was struggling before the curbs were lifted, with consumer spending slumping and industrial output growing at a slower rate than in the spring.

Retail sales in Beijing dropped 18% in November as both cases and restrictions in the capital increased.

According to high-frequency data on subway and road usage there has been little rebound in movement so far this month.

The 3.6 million trips made on the Beijing subway last Thursday were 70% below the level on the same day in 2019. Several major cities are seeing a drop in population.

Home and car sales fell in the first weeks of the month due to that. The bright spot for consumer spending this year was car sales, which were supported by government subsidies. The drop in car production was the first since May when many factories were forced to close.

In the spring, when the Covid Zero policy caused a shortage of car parts and some plants to shut down, now it is the virus itself which is impacting production, with companies having to deal with more workers getting sick.

The opening of the stock and commodity markets has been undermined by the spread of the virus. The index has dropped for the past two weeks and is close to where it was before the curbs were relaxed.

As a surge in Covid cases clouded the near-term demand outlook and undermined the effect of recent announcements of support for the real-estate sector, the price of iron Ore was heading for a modest weekly drop. The data from the industry association shows that output is falling and inventories are rising in the middle of the month.

Small businesses were in contractionary territory for a third month in a row in December. Smaller firms weren't optimistic about the current situation or the future despite a small improvement from November.

According to the report, the manufacturing sector saw a rise in new orders, sales and production from November.

They wrote in a report last week that the services sector continued to face challenges due to weak consumer sentiment.

According to early Korean data, there is little good news for Chinese firms overseas. China's exports could fall for a third month in a row.

The drop in Korean exports to China in the first 20 days of this month is a sign of the weakness of Chinese demand for electronics.

Early Indicators

A weighted average of the monthly changes of eight indicators is used to generate the activity reading.

• Major onshore stocks - CSI 300 index of A-share stocks listed in Shanghai or Shenzhen (through market close on the 25th of the month).
• Total floor area of home sales in China’s four Tier-1 cities (Beijing, Shanghai, Guangzhou and Shenzhen).
• Inventory of steel rebar, used for reinforcing in construction (in 10,000 metric tons). Falling inventory is a sign of rising demand.
• Copper prices - Spot price for refined copper in Shanghai market (yuan/metric ton).
• South Korean exports - South Korean exports in the first 20 days of each month (year-on-year change).
• Factory inflation tracker - Bloomberg Economics-created tracker for Chinese producer prices (year-on-year change).
• Small and medium-sized business confidence - Survey of companies conducted by Standard Chartered.
• Passenger car sales - Monthly result calculated from the weekly average sales data released by the China Passenger Car Association.

James Mayger helped with the project.