China’s economy slumps as Covid politics take their toll

When countries around the world stumbled in the face of the headwinds of the pandemic, China often stood on the sidelines, seemingly unfazed by the financial pressures that undermined growth.

But now, driven 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 heavily dependent on factories and Chinese consumers.

The recession could put additional pressure on the ruling Communist Party at a sensitive time. China is due to hold its party congress this year. A booming economy and growing wealth were part of the bargain that Chinese citizens accepted in exchange for living under authoritarian rule.

But the shutdowns, a core part of Beijing’s zero Covid policy, have heightened the risk of instability, both socially and economically.

China’s National Bureau of Statistics said on Friday the economy grew 0.4% from a year earlier in the second quarter, worse than some economists expected. It is the lowest growth rate since the first three months of 2020, when the country effectively shut down to fight the early stages of the pandemic, and its economy shrank for the first time in 28 years. .

The Chinese economy recovered almost immediately in 2020, but the current outlook is not so promising. Unemployment is near the highest levels on record. The housing market is still in a mess and small businesses are bearing the brunt of weak consumer spending.

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

This is an unwelcome complication in a year when China is trying to project unwavering strength and stability. At the party congress, Xi Jinping, the country’s leader, is expected to renew his five-year term, strengthening his grip on power.

In May, Li Keqiang, China’s premier, called an emergency meeting and sounded the alarm about the need to revive economic growth to more than 100,000 business and local government officials. The stark warning cast doubt on China’s ability to meet its 5.5% growth target for the year.

Slowing Chinese growth is complicating an already fragile global economy. Soaring inflation has increased the risk of recession in the United States, while Russia’s invasion of Ukraine has driven up energy prices and disrupted supply chains across Europe . In previous economic crises, China eased financial pressures through access to cheap manufacturing and a largely untapped market of consumers willing to spend.

But China is no longer growing by leaps and bounds. Covid restrictions and policies carried out in recent years – such as clamping down on property speculation and limiting the power of Chinese tech giants – have combined to exacerbate the downturn. So far this year, Starbucks, Nike and Hilton have all warned that weak spending in China has dented sales.

While much of the world has learned to live with the coronavirus, China has adopted a zero-Covid policy to do whatever is necessary to prevent infection. Under this policy, residents of an entire building can be confined to their homes for weeks if a single tenant is infected. A few positive cases could result in an entire section of a city being locked down.

Even as the toll of these policies became apparent, Mr. Xi did not flinch. He said he was prepared to endure temporary economic hardship in order to protect Chinese citizens from Covid.

The most recent economic malaise hit in April and May, when Shanghai, China’s largest city, was locked down for nearly two months and the impact rippled through the economy. Office buildings have been closed and workers have been ordered to stay at home. Across China, hundreds of millions of consumers have been locked down, leaving shops, restaurants and service providers to carry on without customers.

Zheng Jingrong, owner of a boutique in Beijing selling imported handmade clothes, said she typically sold 150 to 200 pieces of clothing in a month before the pandemic hit. In May, she sold 20. Her regular customers don’t come anymore, she says, and people are generally reluctant to come out. Each year of the pandemic has been “worse than the previous year”, Ms Zheng said.

And the problem is not limited to his clothing store. Ms Zheng said more than 300 stores operated in the same neighborhood as her store in Gulou, a maze of streets and alleys once teeming with food stalls, cafes and bars. She estimated that 20% of these businesses were closing or had closed.

“Because China began to prosper and develop from the 1980s, its economy has always grown,” said Ms. Zheng, who has run the store for 15 years. “Now it’s obviously going down.”

Retail sales, an indicator of consumer spending, fell 4.6% from a year earlier from April to June, the government said. And even though the economy improved in June, the threat of further massive quarantines could derail a nascent recovery.

Japanese securities firm Nomura estimated that as of Monday, 247 million people in 31 cities were under some kind of lockdown in China, covering about a fifth of the national population and representing the equivalent of about 4.3 trillion people. dollars of annual gross domestic product. . The number of cities affected almost tripled compared to the previous week.

Beijing has urged local authorities to step up measures to ensure job stability during lockdowns. And yet, with so many small and medium-sized businesses hurting financially, the government is struggling to bring rising unemployment under control.

In June, unemployment stood at 5.5% – an improvement from April and May, but close to the highest level since China began reporting figures in 2018. For older job seekers ages 16 to 24, which includes recent college graduates, the unemployment rate was more than three times higher at 19.3 percent.

James Fu quit his job last month as a landscaper for a property developer – a grueling job he’s come to hate. But now he faces the anguish of finding a job in a tough job market, particularly in real estate.

Mr Fu, 28, said fewer jobs were available at property companies because companies were struggling financially or using the recession to justify cutting staff and costs. And because the pool of jobs has shrunk, he said, the requirements to get one have increased.

“I’ve been at a standstill recently,” said Mr. Fu, who lives in Chengdu, Sichuan province. “This year is likely to be particularly difficult. I think it has been more difficult since the start of the pandemic.

Along with the high unemployment rate, there are other signs of bubbling economic discontent. On Sunday, there was a rare protest in the central Chinese city of Zhengzhou by depositors demanding their money from four rural banks after their funds were frozen. The protests turned violent when authorities sent guards to disperse the demonstration.

The weakness in the real estate market has also led to public demonstrations of defiance. According to Chinese media, a growing number of homeowners who bought homes before they were built told banks and regulators they would not pay their mortgages, upset by construction delays as well as falling house prices.

When China took action in 2020 to curb property speculation, it pushed many property developers into a spiral of debt, driving down new home prices for the first time in years and shaking consumer confidence. many of whom had invested household savings in real estate. .

In response to concerns over mortgage repayments, China’s banking and insurance regulator said it would work with the whole of central government and with local authorities to ensure buildings were completed and jobs were saved. and to “ensure the stability” of the real estate sector, according to the state – to turn on the television.

Claire Crazy contributed to the research.

#Chinas #economy #slumps #Covid #politics #toll

Post expires at 9:24am on Thursday July 21st, 2022