China’s Economic Recovery Looks Worse Than Expected, This Strategist Says.

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China’s economic performance in the second quarter isn’t looking strong, according to a strategist’s new report.

Results for the three months ending this week will be officially released in July, but an early number-crunching assessment by China Beige Book argues the quarter was likely worse than expected.

One notable finding was that, while most of China’s more serious lockdowns were relaxed in May, June data didn’t show an especially significant recovery. This may be that corporate leaders aren’t confident enough that another round of Covid-zero lockdowns won’t arise, said the group, which advises institutional investors and corporate executives.

“Intensive lockdowns wreaked havoc on domestic demand, resulting in significant Q2 disinflation,” Leland Miller, CEO of the economic research firm, wrote in the report.

“But outside China, the fear is very different—and the threat of China further fueling global inflation comes from two wholly different directions. On the one hand are supply shocks. Yet the reverse is also a worry: If economic activity bounces back strongly after lockdowns are lifted, then rising demand for commodities, especially, could cause an inflationary surge,” he said.

Another takeaway finding from the analysis is that few meaningful policy stimulus measures have been enacted, despite week after week of promises from China’s government.

“Nominal increases in the government’s Total Social Finance (TSF) data from January-May were the second-highest on record, leading some confused analysts to assume a stimulus wave has begun,” wrote Derek Scissors, a senior fellow at the American Enterprise Institute and chief economist of China Beige Book.

“But TSF can be deceptive in terms of corporate credit conditions, which remain as tight as ever. Worse still, borrowing doesn’t appear to be an option for distressed SMEs [small and medium enterprises]: interest rates actually paid by SMEs in Q2 rose yet again, for the fourth quarter in a row,” he said.

The group’s managing director, Shehzad Qazi, elaborated on the stimulus confusion.

“For months markets have anticipated big-bang fiscal stimulus, but we saw nothing of the sort in Q2. Our proxy for fiscal spending, transportation construction, decelerated virtually across the board, as did residential and commercial construction, while our commodities sector lens looks no better,” he said.

“It’s possible Q3 sees the big-bang, but this would no longer be in time to jump-start broader growth before the Party Congress—even if reported otherwise.”

China’s central bank on Monday promised to maintain “monetary policy that will continue to be accommodative to support economic recovery,” People’s Bank of China Governor Yi Gang told state media. While saying inflation was not a concern, Yi said focus would be more on employment, price stability, and small business support.

Also despite the lockdown easing, China’s industrial profits contracted in May, according to data released Monday by the National Bureau of Statistics.

The fall of 6.5% year-over-year was better than April’s 8.5%, however the improvement was due to mostly commodity sellers reaping high prices from the Russia-Ukraine war, according to senior NBS statistician Zhu Hong. Profits in the manufacturing sector took a big hit, shrinking 18.5% last month compared with April’s 22.4%.

Despite the infrastructure measures, a key gauge fell that has previous bode poorly for China’s near-term economic growth. The price of iron ore has fallen sharply this month, hitting a seven month low, indicating that China’s steelmaking demand remains soft. Traditionally, this gauge has been an effective predictor of overall economic performance for the construction and property heavy Chinese economy.

As for retail sales—a measure of consumption—China Beige Book called the April and May data “ugly.” “Weak domestic orders and expanding inventories indicate the presumed second-half improvement will be unpleasantly modest,” it said, noting that the worst-hit sector was services.

Chinese media characteristically portrayed the recent data positively, with state-run Global Times saying work resumption and supply chaos “have been largely addressed,” and the official Xinhua News Agency claiming improvements in all “key indicators.”

Yet China stocks are bucking the global trend and continuing their two-month rally. This week the benchmark Shanghai Composite Index and large-cap CSI 300 Index both continued to rise enough to put them up more than 15% since late April.