Covid Lockdowns Send China's Economy Reeling as Outbreaks Spread

China's economy slowed rapidly in April as the costs of both a worsening Covid outbreak and the nation's stringent approach to eliminating the virus took their toll.

That's the outlook from Bloomberg's aggregate index of eight early indicators for this month. The overall gauge fell below the mark that separates improving from deteriorating conditions, and hit the worst level since April 2020, suggesting the current wave of outbreaks has dealt a serious blow to the economy.

The result for March was revised down from 5 to the neutral level of 4 after factoring in the declines in the purchasing managers' indexes in that month. The almost across-the-board contraction in the PMIs marked a turning point for the economy and came as daily Covid cases spiked from around 100 to about 8,000 a day, prompting lockdowns and restrictions across the country.

Those lockdowns in major Chinese cities including Shanghai have extended into April, continuing to bruise the world's second-largest economy. Financial markets plunged Monday after the government ordered mass tests in Beijing and locked down parts of the capital.

The services industry was already suffering in March, with consumer spending contracting by the most since mid-2020. It's likely industries such as travel and restaurants were hit even worse in April as more people stayed home, either because they were compelled to do so or they were worried about possible infection when going out.

While the manufacturing sector appears less vulnerable than services, restrictions on road transportation and ports have put a cap on the operations of some firms, especially in the areas in and around Shanghai.

Small business confidence dropped to the lowest level in more than two years in April, according to Standard Chartered Plc's survey of more than 500 smaller firms, mainly due to the impact of large-scale lockdowns. Business sentiment also weakened sharply, with the 'expectations' sub-index edging down to a 26-month low, the survey showed.

Both production and demand at small and mid-sized enterprises saw a "a sharp deterioration" in the month, likely weighing on their profitability and investment appetite, Standard Chartered's economists Hunter Chan and Ding Shuang, wrote in a report.

"Prolonged and strict mobility restrictions dragged down business activity in labor-intensive industries, contact-intensive services and the real-estate sector," they said. "In addition, domestically focused SMEs were more impacted by the disruptions than export-oriented SMEs."

Home sales continued to dive and car sales have dropped so far this month, despite a loosening of rules on buying homes in over 100 cities and government policies encouraging purchases of big-ticket items such as automobiles and home appliances.

One bright spot for the economy is the fact that external demand has continued to be strong so far this year. South Korean exports, a leading indicator for global trade, rose at a faster pace in the first 20 days of April than in March, mainly supported by strong US demand. However, shipments to China barely grew, suggesting weak domestic demand.

The outlook is grim, with China's adherence to the Covid Zero strategy meaning more cities could be placed under lockdown. The benchmark stock index has lost almost 10% of its value this month and has dropped by 23% this year, while economists have cut their growth forecasts for China on the widespread restrictions. Without new and stronger policies to prop up the economy, the nation's ambitious target of around 5.5% economic growth this year looks to be in increasing jeopardy.

Early Indicators

• Bloomberg Economics generates the overall activity reading by aggregating a three-month weighted average of the monthly changes of eight indicators, which are based on business surveys or market prices.
• Major onshore stocks - CSI 300 index of A-share stocks listed in Shanghai or Shenzhen (through market close on 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 tones). Falling inventory is a sign of rising demand.
• Copper prices - Spot price for refined copper in Shanghai market (yuan/metric tonne).
• 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.