[Correspondent Diary] Dark Clouds Over China's Real Economy

Consumer Prices Expected to Rise Above 1% After Three Consecutive Months Below 1%
With Party Congress Approaching, China's Communist Party Faces Challenges in Addressing Domestic and International Issues Including Russia and Ukraine

[Asia Economy Beijing=Special Correspondent Jo Young-shin] Dark clouds are looming over China's real economy. As the Shanghai lockdown continues for the 14th day, abnormal signs are being detected in various Chinese economic indicators. The most concerning indicators are the producer and consumer price indices and the gross domestic product (GDP).

[Image source=Yonhap News]

Chinese media such as Xinhua News Agency expressed concerns that the Consumer Price Index (CPI) of China, to be announced on the 11th, will rise compared to the same month last year. Despite pork prices, which started to fall since the end of last year, still being at the bottom, the rise in CPI means that prices of industrial consumer goods such as processed foods have increased significantly.

Xinhua quoted experts predicting that the March CPI will rise about 1.3% compared to the same month last year. China's CPI rose to 2.3% in November last year but remained below 1% for three consecutive months.

Jing Houcheng, director of Yingda Securities Research Institute, said, "Due to the rise in international oil prices and the increase in petroleum product prices in early March in China, the price of fuel for transportation is likely to rise compared to March last year," forecasting that the March CPI will increase.

Tian Xing, chief analyst at Zhongtai Securities Research Institute, explained the background of the CPI increase, saying, "After March, due to the impact of COVID-19, pork prices have continuously declined, and fruit prices have also fallen, but industrial consumer goods prices have soared due to international oil prices."

The rise in industrial consumer goods prices is interpreted as meaning that the Producer Price Index (PPI) has also risen significantly. The PPI has been on a downward curve for four consecutive months since peaking at 13.5% in October last year. The rise in PPI has been suppressed by the Chinese government's raw material price control measures. The PPI affects not only domestic producer and consumer prices in China but also global prices. The rise in China's PPI, as the world's factory, exacerbates global inflation.

GDP is also a problem. As the Omicron variant spreads throughout China, including Shanghai and Jilin Province, Chinese economic experts predict that the economic growth rate for the first quarter will fall below 5%. The first-quarter GDP forecast by the Chinese economic media Caijing is 4.49% (year-on-year), which is far below the 5.5% target set by the Chinese leadership for this year. There are forecasts that the COVID-19 spread in major cities such as Shanghai will only calm down by May, meaning the impact will continue into the second quarter.

[Image source=Yonhap News]

The Omicron variant is also affecting China's electric vehicle production. Chinese electric vehicle manufacturer NIO halted electric vehicle production on the 9th. NIO explained that the production line stopped due to the suspension of parts production by partner companies in Shanghai, Jilin Province, and Jiangsu Province. More than 18,000 new energy vehicle-related companies, including electric vehicle companies, have their headquarters in Shanghai. There is a high possibility that production of other electric vehicle companies besides NIO will also be suspended.

Emergency signals have also been raised for food security. As confirmed cases continue to emerge in Jilin Province, known as China's corn belt, the corn planting season is expected to be delayed by more than 20 days. Jilin Province has been under lockdown since the 11th of last month, with strict movement restrictions on its 24 million population. The delay in corn planting is likely to lead to a decrease in harvest volume, which could increase China's corn imports. Last year, China imported 28.35 million tons of corn, accounting for 10% of its total production.

The Chinese leadership's concerns have deepened ahead of the 20th Communist Party Congress this fall. First, they must achieve the internal goal of stable growth. The 'Wuhan'-style lockdown policy is adversely affecting the economy, and public dissatisfaction is growing. Additionally, external issues such as the Russia-Ukraine war and US-China tensions must be resolved. If the Russia-Ukraine war prolongs, the losses China may suffer could outweigh the gains.