China’s economy is hit by a downturn as Covid policy takes a toll

When countries around the world have stumbled upon pandemic headwinds, China has often stood apart and seemingly impenetrable to economic pressures that undermined growth.

But now, pulled down by its commitment to curbing the spread of Covid-19 with widespread shutdowns and mass quarantines, China has suffered one of its worst quarters in years, threatening a global economy that is heavily dependent on Chinese factories and consumers.

For the country’s ruling Communist Party, the downturn could put further pressure on Beijing at a sensitive time. China is scheduled to hold its party congress later this year. A thriving economy and growing wealth were part of the trade that Chinese citizens in turn accepted to live under authoritarian rule.

But the shutdowns, an integral part of Beijing’s zero-Covid policy, have increased the risk of instability – both socially and economically.

The National Bureau of Statistics in China said Friday that the economy grew 0.4 percent from a year earlier in the second quarter, worse than some economists’ expectations. It was the lowest growth rate since the first three months of 2020, when the country actually shut down to combat the early stages of the pandemic, and its economy shrank for the first time in 28 years.

The downturn in 2020 was short-lived, and the Chinese economy recovered almost immediately. But the current outlook is not so promising. Unemployment is close to the highest level ever. The housing market is still a mess, and small businesses bear most of the weakness in consumer consumption.

“China is the shoe that has never fallen in the global economy,” said Kenneth Rogoff, a professor of economics at Harvard University and former chief economist at the International Monetary Fund. “China is not capable of being the global engine of growth right now, and the long-term fundamentals point to much slower growth in the next decade.”

This is an undesirable complication in a year in which China is trying to project unshakable strength and stability. At the party congress, the country’s leader, Xi Jinping, is expected to run for another five-year term, further cementing his grip on power.

In May, Chinese Prime Minister Li Keqiang convened an emergency meeting and sounded the alarm about the need to increase economic growth for more than 100,000 officials from companies and local authorities. The sharp warning casts doubt on China’s ability to reach its previous growth target of 5.5 percent for the year.

China’s declining growth is complicating an already fragile global economy. Rising inflation has increased the risk of recession in the US, while Russia’s invasion of Ukraine has pushed up energy prices and disrupted supply chains across Europe. In earlier moments of economic crisis, China eased economic pressures with access to cheap manufacturing and a largely untapped market of consumers eager to spend.

But China is no longer growing by leaps and bounds. Covid restrictions have been combined with policies implemented in recent years – such as cracking down on real estate speculation and curbing the power of China’s technology giants – to exacerbate the downturn. So far this year, Starbucks, Nike and Hilton have all warned that weak consumption in China had brought sales down.

While much of the world has learned to live with coronavirus, China has adopted a zero-covid policy to do whatever is necessary to prevent infection. Under this policy, occupants of an entire apartment building could be confined to their homes for weeks if a single tenant became infected. A few positive cases can cause quite a bit of a city to shut down.

Even as the strain of these policies has become apparent, Mr Xi has not backed down. He has said he is willing to endure some temporary economic pain to keep Chinese citizens free of Covid.

The latest economic malaise hit in April and May, when Shanghai, China’s largest city, went into a deadlock for almost two months, and the impact wavered through the economy. Office buildings were closed and workers were ordered to stay at home. Across China, hundreds of millions of consumers were locked inside – leaving stores, restaurants and service providers to continue without customers.

Zheng Jingrong, an owner of a store in Beijing that sells imported handmade clothing, said she had typically sold 150 to 200 pieces of clothing in a month before the pandemic. In May, she sold 20. Her regular customers are no longer coming, she said, and people are generally reluctant to go out. Each year of the pandemic has been “worse than the year before,” Zheng said.

And the problem is not limited to her clothing store. Zheng said more than 300 stores used to operate in the same neighborhood as her store in Gulou, a maze of streets and alleys that once abounded with food stalls, cafes and bars. She estimated that 20 percent of these companies closed or had closed.

“Because China started booming and evolving from the 1980s, the country’s economy had always been booming,” said Zheng, who has run the store for 15 years. “Now it’s obviously going down.”

Retail sales, an indicator of how much consumers spend, fell 4.6 percent from a year earlier in April to June, according to the government. And although the economy improved in June, the threat of further mass quarantines could derail an incipient recovery.

The Japanese investment firm Nomura estimated that 247 million people in 31 cities as of Monday were under some form of lockdown in China, covering about one-fifth of the national population and accounting for the equivalent of about $ 4.3 trillion in annual gross domestic product . The number of affected cities has almost tripled from a week earlier.

Beijing has called on local authorities to step up measures to ensure job stability during shutdowns. And yet, with so many small and medium-sized businesses suffering financially, the government has struggled to cope with rising unemployment.

In June, unemployment was 5.5 percent – an improvement from April and May, but close to the highest level since China began reporting the figures in 2018. For jobseekers aged 16 to 24, which includes recent university graduates, unemployment was more than three times as high by 19.3 percent.

James Fu resigned from his job last month as a landscape designer for a real estate developer – a grueling job that he grew to hate. But now he is dealing with the anxiety of finding a job in a tough job market, especially in real estate.

Mr. Fu, 28, said fewer jobs were available at real estate companies because companies were either struggling financially or using the downturn to justify staff and cost cuts. And because the pool of jobs has shrunk, he said, the demands to secure one have increased.

“I’ve been standing still lately,” said Mr. Fu, who lives in Chengdu, Sichuan Province. “This year could be particularly difficult. I think it’s been harder since the pandemic began.”

Along with the high unemployment, there are other signs of bubbling economic discontent. On Sunday, there was a rare demonstration in the city of Zhengzhou in central China of depositors demanding their money back from four rural banks after their money had been frozen. The protests turned violent as authorities sent guards in to break the demonstration.

Weakness in the real estate market has also led to public demonstrations of defiance. An increasing number of property owners who bought homes before they were built have declared to banks and regulators that they will not pay off their mortgages, disrupted by construction delays as well as falling house prices, according to Chinese media.

When China implemented measures to curb real estate speculation in 2020, it pushed many real estate developers into a debt spiral, lowering the prices of new homes for the first time in years and rattling consumer confidence, many of whom had plowed household savings into real estate. .

In response to concerns about mortgage repayments, China’s banking and insurance regulator said it would work across central government and with local authorities to ensure buildings are completed, jobs are saved and “ensure stability” in the real estate industry, according to the state-run television.

Claire Fu contributed research.

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