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China’s Zero-Tolerance COVID-19 Policy has come at a significant cost. According to recent data, the country’s economic growth rate is losing speed, prompting questions over the full-year perspectives. Industrial production rose 3.8% over the year from 3.7% a month earlier, semiconductor production fell 16.6%, and the purchasing managers’ index fell to 49 points.
Analysts at Goldman Sachs were among the first to lower the Chinese GDP forecast from 3.3% to 3%. Nomura Holdings went even further and revised its outlook for economic growth from 3.3% to 2.8%. What about the fact that the People’s Bank of China cut its one-year medium-term lending rate to 2.75% from 2.85%?
Nomura Holdings Inc called the move unlikely to help boost demand for credit and support economic growth. The good news is that the regulator is likely to continue taking measures to support the economy. Still, judging from the Hang Seng Index (HSI) move, investors don’t look very optimistic.
As for the epidemiological situation in the country, the number of infections rose to a three-month high. There were 3,424 cases across China, up from 2,888 the day before. Hainan province was the focal point. New lockdowns will only make things worse for the economy.
But it’s not just the coronavirus that’s hurting the country’s economy. Low rainfall in southern China, including Sichuan, Yunnan, and Guizhou provinces, is causing problems for local hydropower plants. The drought could hurt power supplies in eastern China. The good news is that the effects will be seasonal and short-lived.
The neighboring city of Chongqing has said it will stop industrial power supply until August 24, according to the news outlet jiemian.com. Sichuan’s power supply remains strained due to ongoing heat waves, rapid increases in power consumption such as air conditioning, and drought.
Due to power problems, battery maker Contemporary Amperex Technology Limited (CATL) (Tesla supplier), Foxconn Technology (Apple supplier), Toyota factories, Texas Instruments, Volkswagen, lithium, and aluminum mining companies, etc. have already faced problems.
Finally, yet importantly, year-to-date the USD/CNY pair went up by more than 7%, while the euro has depreciated against the U.S. currency by almost twice, by 13%. In other words, betting on the Chinese currency might not have been the best strategy, though it could have been worse. Still, keep in mind that PBoC usually does not allow the national currency to go beyond 6-7 yuan per U.S. dollar.
