China’s economic growth slowed sharply to just 0.4% in the second quarter from a year ago as Covid-related restrictions dealt a heavy blow to sectors ranging from consumption to real estate.
The dismal performance, which was announced Friday by the National Bureau of Statistics (NBS), marks the weakest growth since the start of the pandemic in 2020 and it also fell short of analysts’ expectations of around 1%. It included a 13.7% contraction in Shanghai’s gross domestic product and a 2.9% contraction for Beijing, as both cities implemented widespread restrictions to eradicate the highly infectious Omicron variant.
Shanghai, in particular, entered a grueling two-month lockdown that spanned from April to June. Authorities have crippled the automotive and financial hub of 25 million people, sparking widespread anger amid food shortages and chaotic disruptions to logistics and production.
And continued adherence to a zero-tolerance approach, which still includes ongoing mass testing and partial shutdowns of cities such as Xi’an and Wuxi, is widely seen as putting the ambitious goal out of reach. China’s GDP growth of 5.5% for this year. . New infections in Shanghai, meanwhile, have raised fears of a return to lockdowns, with residents urged to stockpile food and other necessities.
“President Xi Jinping reaffirmed in late June the target of 5.5% growth in 2022. However, we do not believe that China can recover enough ground in the second half,” wrote the Moody’s economist. Analytics Heron Lim in a research note, even calling his recent forecast of 4.3% growth in 2022 optimistic.
Meanwhile, Nomura economists led by Lu Ting forecast annual GDP growth of 4% for the third and fourth quarters. In a Friday research note, analysts said headwinds remained strong. A global economic slowdown could hit China’s export sector, and the zero-Covid policy will be largely in place for the rest of the year. “We believe markets have become overly optimistic about growth in the second half,” the economists wrote.
Beijing has acknowledged the price the country is paying for its tough policies. In its own release of second-quarter GDP data, the NBS said economic development faced “significantly increased negative impacts” and “extreme complexities and difficulties”. “But he also pointed out that growth across all sectors, from retail to manufacturing, started to pick up in June as some of the Covid-related restrictions were lifted.
But the problems came from elsewhere. Real estate, which by some estimates could account for up to a quarter of China’s GDP, is suffering a spiraling crisis as Beijing’s campaign to reduce leverage and reduce soaring oil prices real estate has crippled indebted developers from Evergrande to Shimao.
Now, after these cash-strapped companies halted construction of some pre-sold apartment complexes, homebuyers across the country are refusing to pay mortgages unless work on the projects resumes. In a Thursday research note, Jefferies analysts led by Chen Shujin estimated the delayed projects could lead to a 388 billion yuan ($57.5 billion) increase in non-performing loans at Chinese banks.
Analysts called the level manageable, as the funds tied to these apartment buildings represent only 1% of the total mortgage balance. But they predicted more “risk events” in the future due to factors such as slowing growth, people’s expectation of lower future incomes as well as falling real estate sales. In the central province of Henan, for example, a banking crisis emerged when customers discovered in April that they could not withdraw deposits totaling tens of billions of yuan from four rural banks. Protests by angry customers were violently put down on social media, further fueling people’s anger.
Chinese authorities, for their part, have said they will first reimburse individuals with deposits of up to $7,400, as police rush to investigate what they describe as a bank scam orchestrated by the company. private investment company Henan Xincaifu Group. Police said last week they had already arrested some suspects and frozen funds and assets involved in the case. Authorities said they would develop a plan and pay the rest of the victims subject to further notice.
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