Daily Brief: China Stopped Growing Entirely Last Quarter, Which Is Going To Come Back On All Of Us

Daily Brief: China Stopped Growing Entirely Last Quarter, Which Is Going To Come Back On All Of Us

over 1 year ago3 mins

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Data out on Friday showed that China’s economy posted its second-worst quarterly growth in 30 years.

What does this mean?

We’ve had our whole team of analysts working on this head-scratcher all day, and they’ve come to a startling conclusion: it turns out that shuttering businesses and keeping your population locked in their homes isn’t productive for a country’s economy. No, really: China’s services sector – which accounts for over half its economy – shrank 0.4% last quarter from the same time last year, while its retail sales dropped 4.6%. It’s just a blessing that some Chinese factory workers basically lived on site, since manufacturing output managed to grow 0.7%. But hostage-taking only goes so far, and the country’s economy ultimately only grew by 0.4% – well below the 4.8% of the quarter before.

China GDP

Why should I care?

Zooming in: Be ambitious, but be realistic.

We now know that China’s economy grew 2.5% in the first half of the year, making its government’s full-year target of 5.5% – already a 30-year low – look well out of reach. Its economy would now need to grow by around 8% for it to happen, even as the country stands by a zero-Covid policy that’s currently putting a quarter of its population under some form of restriction. That simply isn’t going to happen, says Goldman Sachs: the investment bank now thinks the country’s economy will grow just 3.3% this year.

China Covid cases

The bigger picture: A true underdog story.

China is a huge buyer of everything from oil to corn, so this slowdown doesn’t bode well for a global economy already hit by recession concerns. But China isn’t going down without a fight: economists are expecting its government to introduce hundreds of billions of dollars worth of stimulus to boost growth for the rest of the year.

Keep reading for our next story...

Two Big US Banks Posted Diverging Quarterly Results

Wells Fargo / Citi image

Wells Fargo posted a disappointing quarterly update on Friday, but Citigroup managed to claw back some credibility.

What does this mean?

Wells Fargo has been bracing for an economic slowdown that could leave borrowers unable to pay back their debts, so it put aside $580 million for “loan loss reserves” last quarter. It had to write down $576 million worth of assets tied to its venture capital business too, and its mortgage income fell 79% as higher rates limited the number of new deals and refinancings. All in all, Wells Fargo’s profit didn’t just fall: it fell short of analysts’ expectations.

Wells Fargo mortgage revenue

Citi, on the other hand, blew past them, even though it posted a lower profit of its own and had to put aside $1.3 billion in loan loss reserves. That could be down to the 14% more in net interest income compared to the same time last year, as well as the benefit its commodity and currency trading businesses got from volatile markets.

Citigroup trade revenue
Source: The Wall Street Journal, Citigroup

Why should I care?

For markets: Russia is a hard sell.

Citi’s stock jumped 11% after the announcement, but it’s still being beaten by Wells Fargo’s this year. It’s the cheapest of the six biggest US banks by multiple valuation metrics too, probably because it’s the most exposed to Russia. After all, it’s been struggling to sell its consumer and commercial banking business in the country, with the bank projecting that the whole debacle could set it back $2 billion.

Citi stock
Source: Google Finance

Zooming out: We’re all in this together.

Investment managers are experiencing a similar set of issues: BlackRock – the biggest in the world – announced on Friday that the slumping market has dragged down the value of the portfolios it manages. So even though investors poured a net $90 billion more into its range of funds last quarter, BlackRock’s profit still collapsed by a worse-than-expected 30% from the same time last year.

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