Zero-Covid, Zero-Growth

Weekly Briefs
23 May 2022
8 min read
Zero-Covid, Zero-Growth

This week brought further evidence of the big damage being done to China’s economy from the government’s zero-Covid policy. The country can’t have it all: it’s trying to reduce debt and eliminate Covid all the while trying to hit a growth target that’s looking increasingly unachievable. But sacrificing growth might be the lesser of two evils compared to allowing Omicron to spread unchecked. Let’s see why.


The week kicked off with some unpleasant macro data coming out of the world’s second-biggest economy: Chinese consumer spending and industrial output slumped last month to their lowest levels since the pandemic began. Retail sales, which had already contracted in March, collapsed 11.1% in April from a year ago – far worse than the 6.6% drop economists were predicting. Industrial output, meanwhile, unexpectedly fell 2.9%.

Covid lockdowns drive Chinese industrial output and retail sales into contraction for a second time. Source: Bloomberg

The Chinese government is trying to hit a 2022 growth target of about 5.5%, reduce debt, and eliminate Covid. But all these goals contradict each other, and the government will ultimately have to prioritize some at the expense of others. That’s why most economists have now slashed their growth forecasts for the country to well below 5.5%, arguing that this goal simply isn’t achievable as long as China sticks with its zero-Covid policy. But sacrificing growth might be the lesser of two evils: China risks 1.6 million deaths if the government allows Omicron to spread unchecked, according to researchers at Shanghai’s Fudan University.

What’s more, China’s issues could further fuel global stagflation. See, right now, major central banks are aggressively raising interest rates in an effort to lower demand and tame inflation. But a big part of the inflation problem isn’t down to demand: it’s down to supply. And with Chinese manufacturers struggling and port activity falling, shortages of goods are only going to intensify. Consider too that China’s problems aren’t just contributing to inflation: they could likewise lead to a drop in global economic growth. China accounts for almost one-fifth of global output, meaning the country’s slowdown could have serious – potentially stagflationary – repercussions for the global economy as a whole.

Over in the US, retail sales fared better, growing 0.9% in April from the month before. While that was slightly below the 1% economists were expecting, it marked the fourth-straight month of increased retail spending. That suggests consumer demand remains resilient despite soaring inflation. Part of the reason why could be that spending is shifting away from goods and toward services like travel and entertainment as pandemic concerns fade and demand for summer activities picks up. Put differently, the size of the “spending” pie remains stable, but its ingredients are shifting.

US retail sales continued to rise despite decades-high inflation. Source: Bloomberg

It’s important to note that the US retail sales data isn’t adjusted for inflation. That means that while consumers have continued to spend more, they are either getting less bang for their buck or have to increasingly rely on credit to keep up with price increases. In fact, data out earlier this month showed US credit card borrowing in March soared by the most on record, while a separate report from the New York Fed showed Americans opened a record 537 million credit card accounts last quarter. Even crazier when you consider that the entire US population is 330 million…

US consumer credit rose by a record $52 billion in March. Data source: Federal Reserve


Shares in Walmart tumbled 11% on Wednesday after the retailer cut its full-year profit forecast due to inflationary pressures. The share price reaction – particularly severe for typically less volatile consumer staple stocks – was the biggest one-day drop since the eve of the Black Monday stock market crash almost 35 years ago. The firm said it expects earnings to drop by about 1% this year – a dramatic U-turn from its previous guidance of mid-single-digit growth. The main culprit? Inflation, with Walmart’s costs for merchandise, transportation, and labor all soaring and eating into its already thin profit margins.

Walmart had been outperforming its peers (food/staples retailers) this year, but it gave up all those gains after its stock price tumbled on Tuesday. Source: Bloomberg

Walmart is the world's largest retailer and is regarded as a bellwether of the American consumer. When asked for insight on whether shoppers are pulling back their spending as they get squeezed by the highest inflation in four decades, the retailer said it’s seeing some consumers switch to cheaper private-label brands in the grocery. So expect that trend to continue and for American consumers to find other ways to reduce the cost of their shopping.


The price of wheat surged at the start of the week to near a record high after India announced over the weekend that it was restricting exports of the key cereal crop. India, the world’s second-biggest wheat producer after China, had plugged a gap in markets left by decreased output from Ukraine thanks in part to a bumper harvest last year. But the country now wants to restrict exports to manage its food security. Wheat’s big jump helped push a price index of agricultural commodities to a new record high this week.

An index of agricultural prices hit a record high. Source: Bloomberg


The implosion of TerraUSD, which we covered last week, has sent shivers through crypto investors’ spines, and that’s starting to affect other stablecoins. Just look at Tether: the world’s biggest stablecoin sank to as low as 95 cents late last week before returning to close to dollar parity. Since then, its market value has dropped from around $83 billion to $74 billion as tokens have been removed from circulation to meet redemption requests. Tether’s operators have said the token is backed by a basket of dollar-based assets equal to the value of the tokens outstanding, but they’ve not released granular details of these reserves.

Tether's market cap has dropped by 11% – or $9 billion – since rival stablecoin UST get depegged. Source: CoinMarketCap

Despite stablecoins’ recent woes, news broke out this week that the UK Treasury is pressing ahead with plans to legalize stablecoins as a form of payment in Britain. The plans will not legalize algorithmic stablecoins like the failed TerraUSD, but focus instead on those fully backed by reserves, like Tether (USDT) and USD Coin (USDC). The UK’s decision is part of its efforts to place its financial services sector at “the forefront of technology”, and should provide a boost to the stablecoins sector – not to mention a much-needed lift to investor sentiment after last week’s implosion of TerraUSD.

Finally, here’s another interesting data point for you: despite all the recent volatility in the crypto market, investors poured $274 million into crypto funds last week – the highest weekly inflow so far this year. That’s a strong signal that investors saw last week’s crypto market sell-off as a buying opportunity. Bitcoin funds were the main winners, with inflows of $299 million last week. That suggests investors were flocking to the relative safety of the largest and most well-established digital asset in light of the market turmoil.

Investors poured $274 million into crypto funds last week – a new year-to-date record. Source: CoinShares

Next week

Flash PMI data (or purchasing managers' index, which is a survey of business activity across the manufacturing the services sectors) for May will be released for many economies next Tuesday, giving us a first look into economic conditions midway into the second quarter. The Fed’s May meeting minutes are also due, which will give us further clues into the US central bank’s thinking with regards to monetary tightening. On the earnings front, ones to watch out for are 1) Best Buy after some big US retailers gave disappointing earnings outlooks; and 2) Alibaba and Baidu to see how Chinese tech companies are coping with the government’s heavy crackdown on the sector.

General Disclaimer
The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.

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