A just-published report examined the flaccid state of Chinese consumption. Spending by consumers is typically weak during the summer months, but a renewed rash of lockdowns is only exacerbating uncertainty in the household and business sectors. The collateral damage from China’s COVID-zero strategy has been plaguing growth momentum since March this year, and so far, every attempt at a reopening rebound has been snuffed out by another massive regional lockdown.
At the root of the issue is the drift away from pragmatic economic policymaking in favor of ideologically-driven decision-making, which has been the hallmark of Xi Jinping’s tenure. Officials in charge of the economy regularly promise more stimulus, but it has all so far been directed at the supply side, not the demand side of the economy. Burgeoning bond issuance may well generate stronger data on fixed asset and infrastructure investment, but it does little for business or consumer confidence, especially with the property sector in a policy-induced recession.
The bulk of the earnings in China’s stock market is driven by consumer spending and more broadly domestic demand, and forward earnings expectations are falling. It is hard to sustain a stock rally on liquidity alone, and falling interest rates across the yield spectrum are, for the time being, merely creating a liquidity trap rather than arousing the animal spirits. Chinese economic momentum will continue to recover sequentially after a disastrous second quarter, but the growth outlook can only be mushy for as long as the commitment to COVID-zero stays.