It was with good reason that QI’s flagship Weekly Quill, published January 5th, “China, CRE and Central Banks: Xi Jinping Fights to Hold on in the Year of the Black Water Tiger.” As we deeply delved (see below for link) in the Gregorian Calendar’s first week, for Chinese President Xi Jinping who embraces the Lunar Calendar, 2022 should be fortuitous – Xi was born in 1953, a year of the Snake. Aside from 8 and 9, this Zodiac’s other lucky number is 2, which must hearten Xi as this year contains three of them. Less fortuitous for Xi’s birth year is the month of October. While the 20th Chinese National Congress’ dates will not be released until closer to its kickoff, QI’s money is on the “fall” event taking place in November, as Xi seeks an unprecedented ‘FDR-esque’ third term as President. For Xi’s sake, he can only hope he’s afforded the latitude to lead until then, such that he will be positioned to seize one of history’s few slots as supreme leader of the Middle Kingdom.
We dare say that 2022’s Lunar New Years’ celebrations, which commence today, will not be as jubilant as normal. Nerves are running high in this Black Water Tiger Year, which only falls every 60 years. Speaking of which, Li Zhanshu, one of Xi’s potential political rivals, is a Tiger and knows well the calendric import of his elevated place in time. If there was ever a time to strike out at Xi, who most bet will enter 2023 as the Supreme Leader of the CCP for his remaining years, it is now. The Olympics are also raising tensions around the globe. Western leaders, including those from the U.S., U.K. and Canada have boycotted the games while Vladimir Putin will be conspicuous in his presence. We dare say Taiwan is wise to send its athletes, but not its officials given the risk that China use politics to “interfere” with the event or “belittle” this island, which Beijing insists on referring to as “Chinese Taipei,” as it’s seen as part of “one China,” a sacrosanct Chinese territory.
As if there isn’t enough to ponder with this Friday’s Opening Ceremony looming, the Lunar New Year (LNY) always throws a wrench into seasonals as financial trading flows are interrupted and economic data, especially those off the mainland, are distorted. Many key indicators don’t have January or February data points because of LNY. One exception is China’s manufacturing PMI — January data were released for January just prior to this week’s festivities getting underway.
In tandem with our regional Federal Reserve and domestic Fed survey practices, we’re guided by China’s PMI New Orders-Inventories Composite, which combines IHS Markit’s data with that of the official China Federation of Logistics and Purchasing. Helpfully, this series informs the broader Emerging Market universe given China’s role as the world’s marginal buyer that drives nearly a third of global economic output. It was thus notable that this metric fell to zero last month. In the context of a longer-run average of about 4, trend has been broken to the downside which should fuel the extent to which it is clearly below trend. Such a result could generate additional speculation as to the extent officials and the People’s Bank of China will stimulate the economy.
As for the rest of the world, whether through Markit’s (orange line) or “official” figures (purple line), global demand via the prism of Chinese New Export Orders is challenged. The former has run below the 50-breakeven-mark since August, while the latter’s contraction dates back nine months. Buffeted by a roiled property market, could said export drag explain last Thursday’s 0.7% depreciation in the Chinese yuan/U.S. dollar exchange rate? It did qualify as a +3 z-score (deviation from the mean adjusted for volatility) for daily moves.
Given that Texas is the top exporting state, it’s no surprise the Dallas Fed manufacturing survey ebbs and flows with that of China. To wit, Texas’ factory sector underperformed during 2015-16’s industrial recession, bested the nation throughout the 2017-18 global expansion, and bumped about in late-2018 and 2019 roiled by the trade war. As China’s exports have deteriorated over the last year, the Dallas Fed index (light blue line) has exhibited a head-and-shoulders pattern.
As for home grown fiscal stressors, Texas manufacturers are encumbered by the war for labor. A special COVID questions survey revealed 83% are trying to hire or recall workers, a post-pandemic high. The top three impediments cited were: lack of available applicants/no applicants (71.8%); Workers looking for more pay than is offered (57.7%); and Lack of technical competencies (hard skills, 52.6%). It can’t help that factory workers are among the most aggressive job hoppers. When queried: “How did your firm’s employee quit rate, including retirements, over the last six months compare to pre-COVID levels?’ 53% said it was higher, while only 1% responded it had fallen.
Today’s Job Openings and Labor Turnover Survey will provide lagged context about December’s hiring environment as we look to jobs Friday. Manufacturing Quits (red line) have, until recently, steadily increased; in 2021’s second half, feeling their inner Black Water Tigers rising, they exceeded the number of factory workers collecting unemployment insurance (yellow line) which manifested as January’s record rise in wages & benefits (green line). Soaring costs and tamped down global growth prospects have, like China, rendered vulnerable America’s biggest exporting state and second largest economy.