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China's economy is groaning under the strain of increasingly restrictive zero-Covid policies. Factory closures and lockdowns took a heavy toll on both manufacturing and services in March. Policymakers are relying on the existing toolkit, deployed more rapidly, for now.
Chinese industry faces rising costs, both from global markets and domestic Covid policies... ...Coupled with weaker demand, this implies that profitability will be under heavy pressure this year. Policy efforts to support China's struggling firms will likely raise tensions with trading partners.
We think Japan's flash manufacturing PMI was mostly bad news, despite a bounce in the headline. Forward-looking components turned south, and we expect the final print, and next month's, to be softer. A drop in new export orders is another signal that global trade is struggling amid renewed shocks.
Preliminary trade data from Korea point to a loss of momentum for global trade in March. War and Covid have tightened some bottlenecks, but demand is also under pressure from oil prices. The PBoC again opted not to ramp up monetary easing, despite recent messaging from Beijing.
Japanese exports bounced back in February, as holiday effects reversed, but should fade from here. Challenges are growing for both demand and supply, with no clear resolution in sight for either. China's property market shows no sign of recovery, and policymakers are getting nervous.
China's state sector led a rebound in economic growth in early 2022, as investment surged. Data is always noisy at this time of year, however, and the surge is driven by frontloading spending. Growth will likely slow by April, given soaring Covid cases and base effects, prompting more easing.
Energy and food are set to drive Chinese inflation dynamics, but base effects will play a big part. Global commodity prices are surging, but the link to domestic consumer prices is modest. The PBoC will stay dovish, and may ease more ag- gressively, due to--not in spite of--the cost shock.
Slower export growth provides a taster of the challenges facing China's economy in 2022. The Work Report--a government scorecard and road map--suggests a reliance on infrastructure... ...but convincing local governments and banks to do their part is going to be difficult, and risky.
Press headlines around the end of China's zero- Covid stance have generated great excitement... ...But in reality, the policy shift looks as distant as ever, even if clarity is to be welcomed. Services will face persistent headwinds this year, boosting reliance on state support for growth.
Regional PMIs show cost pressures were already rising on the eve of Russia's invasion of Ukraine. The behaviour of oil and other commodity prices signals further increases to come. We expect these cost increases to be passed on to consumers, amidst strong external demand.
China's activity surveys were better than expected in February, and a touch of optimism is warranted... ...but should be freighted with caution, given holiday effects, and evidence that demand is still soft. Policy stimulus is feeding through, but stability is the watchword, not explosive growth.
Russia's invasion of Ukraine puts China in a tricky position diplomatically, but it won't mind too much... ...What matters more to China is the impact on energy prices, at a time of softening growth. Announcements signal more support from the centre, but bang-for-buck will be lower than usual.
Korean exports had a slow start to February, chiefly because of holidays in Korea and China. Japanese manufacturing similarly looks soft at the moment, but should recover almost fully in March. Little sign of supply chain improvements so far, but a reopening is underway in China.
Japanese export growth slowed unexpectedly in January, but it's not as bad as it looks... ..factory closures in China, thanks to holidays, pollution, and Covid, explain much of the weakness. We remain positive on the global demand backdrop for exports, but supply congestion is rising.
Chinese inflation continued its decline in January, thanks to base effects and weak demand. The main constraint on PBoC action is worries over financial stability, not inflation. China should export disinflation in 2022, a soothing balm for policymakers outside China.
Japanese GDP growth returned to positive territory in Q4, thanks to a rebound in consumption. Consumption will be under pressure in Q1, thanks to Omicron, but investment should recover. Chinese stimulus remains very modest, illustrated by a net withdrawal of liquidity this month.
Record weakness in Chinese M1 growth is only partly attributable to seasonal and base effects... ...Weaker risk appetite, and softer economic activity, underlie the drop in liquid deposits. Credit growth continued to become more heavily dominated by the state in January.
Regional manufacturing PMIs have diverged in recent months, thanks to Chinese factory closures. Japan and Korea likely will converge towards China, but should be cushioned by external demand. China's employment situation is getting worse, but policymakers are staying the course, for now.
Korea's manufacturing sector is having a happy new year, despite Omicron outbreaks. The PMI survey provides encouraging signs for global demand, with new export orders bouncing... ...It also points to an easing of some bottlenecks, with more to come as stockpiling fades.
Korean exports indicate continued strong external demand, despite the January slowdown. Holiday distortions and base effects weigh on the year-over-year number. Bottlenecks, and Chinese factory closures, are the main risks to the outlook.
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