By Ye Xie, Bloomberg Markets Live analyst and reporter
Three things we learned last week:
1. China’s credit growth plunged. Friday’s data showed banks lent 645 billion yuan ($94.9 billion) of new loans in April, when Shanghai was locked down. It was less than half of the amount expected, and the lowest since 2017. The credit slump creates a strong case for policy easing, as Bloomberg economist David Qu wrote. Indeed, nine of 14 economists surveyed by Bloomberg expect the benchmark one-year loan prime rate will be cut this week.
Lower rates may help on the margin, but when Covid restrictions disrupt the economy and life, business and households may remain reluctant to borrow to expand production or buy homes. The biggest stimulus would be a turnaround in public-health policies.
2. Speaking of which, Beijing appears to have settled on regular mass testing to strike a balance between sticking to the zero-Covid policy and minimizing economic harms. The National Health Commission said Friday Covid tests will be available within a 15-minute walk in big cities, aiming to detect virus flareups early and impose more targeted lockdowns.
That may add to China’s already high debt load. There are growing calls for Beijing to issue “special sovereign bonds” to fight the pandemic. In 2020, 1 trillion yuan ($147 billion) of such debt was sold.
But will it work? Beijing’s experience offers a cautionary tale. The city began its regular Covid testing three weeks ago. While the Chinese capital is not under an official lockdown, many of what were once the city’s busiest streets are now deserted and the virus continues to spread in the community.
3. China’s Covid struggle adds to markets’ concern about the global economy. With stocks declining and credit spread widening, Goldman Sachs’ financial condition index rose 2 percentage points over the past year. That points to a significant headwind for economic growth in coming months. This chart compares the annual change in Goldman’s index (inverted) and the level of the ISM manufacturing index.