An uncompromising zero-COVID approach sharply slowed China’s economic growth in the second quarter of this year, according to a BBC report. In a rare move, China’s central bank cut lending rates on August 15 to revive demand. Growth has halted, youth unemployment reached a record high, the housing market looks wobbly and companies are struggling with supply chain constraints. The 2022 second quarter numbers are China’s worst ever since the current data tracking began in 1992, according to Reuters.
China’s job market has sharply deteriorated in the past few months. Most recent data showed that the unemployment rate among 16 to 24 year-olds hit an all-time high of 19.9% in July, the fourth consecutive month it had broken records. That means China now has about 21 million jobless youth in cities and towns. The overall figure is likely to be much higher since rural unemployment isn’t included in official figures.
“For China, it’s a societal issue,” Alicia García-Herrero, the Hong Kong-based chief economist for Asia Pacific at Natixis bank informed The Guardian. “A lot of people will ask now: where is my future? It kind of breaks their ‘China dream’. This is a key problem now.” There are signs of distress in China’s housing market. An increasing number of home buyers are refusing to pay mortgages on unfinished projects, Bloomberg News reported in early July. Chinese property developers sharply cut investment in July, while new construction starts suffered their biggest fall in nearly a decade. It must have been a serious concern for banks and for the ruling Communist Party ahead of leadership meetings in the fall. Industrial metal prices fell in mid-August as worries about demand in China surfaced due to weak economic data and a firmer dollar.
The slowdown was particularly visible in individual consumer spending, despite authorities’ efforts to build up consumption as a driver of economic growth. Consumers cut back on spending across the board, whether it was on big-ticket items like cars or lower-cost products like cosmetics available online from e-commerce platforms.
China, the world’s second-largest economy, had been badly hit by widespread coronavirus lockdowns negatively affecting both businesses and consumers. The Gross domestic product (GDP) fell by 2.6% in the three months to the end of June from the previous quarter.Major cities across China, including the major financial and manufacturing hub Shanghai, were placed on full or partial lockdowns during this period. Together these hubs of manufacturing and transport are home to 127 million people. In April, not a single automobile was sold in Shanghai, according to a report in the Washington Post. Shanghai’s economy reportedly shrank by 13.7 percent during the quarter ending in June. The length and severity of Shanghai’s lockdown sent shockwaves through global supply chains and even led to a rare outburst of public dissent from residents who complained of food shortages and arbitrary quarantine measures.
Nationwide, at least 74 cities had been closed off since late August, affecting more than 313 million residents, according to CNN calculations based on government statistics. Goldman Sachs in September estimated that cities impacted by lockdowns accounted for 35% of China’s gross domestic product (GDP). It was China’s worst economic performance in two years, adding to concerns about the prospect of a global recession. Growth declined to 0.4 percent in the three months that ended in June from a year earlier, the National Bureau of Statistics said. Independent economists are of the opinion that the Chinese economy probably shrank over that period. Logan Wright, director of China markets research at Rhodium Group, told the Washington Post that declines in freight and passenger traffic, property sales, the output of major construction materials, and household consumption all indicated bleak prospects.
In early July, Chinese Premier Li Keqiang visited the coastal city of Fuzhou to meet with officials from across the south-eastern industrial belt about how to stabilize the economy. According to the official Xinhua News Agency, Li urged officials to steer the economy “back on track.” The sharp slowdown is a setback for China, which last year had been leading the pack of major economies in its rebound from the pandemic. Beijing’s leaders have since strengthened their “zero-COVID” approach. They are reportedly worried that too many will die if China were to lift restrictions and reopen. “Beijing appears willing to absorb the economic and social costs that stem from its zero-COVID policy because the alternative — widespread infections along with corresponding hospitalizations and deaths — represents an even greater threat to the government’s legitimacy,” Craig Singleton, senior China fellow at the Foundation for Defense of Democracies, a Washington DC-based think tank, told CNN in September.
For Chinese premier Xi Jinping, maintaining that legitimacy is more vital than ever as he seeks to be selected for an unprecedented third term during the Communist Party Congress currently underway. In a trip to Wuhan in June, he said China must maintain its zero-Covid policy “even though it might hurt the economy.” At a leadership meeting in July, he reaffirmed that approach and urged officials to look at the relationship between virus prevention and economic growth “from a political point of view.”Any change in approach may not come until next year, and even then it’s most likely to be very gradual, Zhiwei Zhang, president and chief economist for Pinpoint Asset Management told CNN in early September. “The Chinese economy in the second half of 2022 still faces the uncertainty of periodic lockdowns in response to new COVID breakouts,” Shang-Jin Wei, a finance professor at Columbia University told the Washington Post. “If a recession breaks out in the U.S. or Europe, it will add further difficulty to the Chinese growth.”
Experts from Wharton and Stanford University believe that the challenges to China’s economy are deeper, structural, longer term, and have been building for years. These include over-investment, high savings and modest, if growing, consumer spending, high debt and low industrial productivity. Marshall W Meyer, an emeritus management professor at Wharton Business School, observed in 2019 that the graph of China’s economic growth has declined since 2009. Three of the most important challenges an ageing workforce, a “regression to the mean” – countries that grow quickly “almost always encounter … very rapid deceleration in growth at some point” and “excessive reliance on capital investment,” particularly in infrastructure. But the most fundamental — and crucial — issue for China’s economic future is lagging productivity, according to Meyer. Productivity – “the amount of output we get per level of input” – is the most important driver of GDP in the long run for every economy and it has been low in China. In most industrial sectors, “some economists say it has been negative since as early as 2007. And certainly, I would say with a little more certainty since, 2012-13.”
There is an increasing gap between the rich and the poor, just as there is in the U.S. “Wages in East Coast Chinese cities are going up drastically while the wage gap between the coast and interior is [becoming] greater and greater,” noted Richard Dasher, director of the U.S.-Asia Technology Management Center at Stanford. “You really have tension inside the country.” Chinese officials may not have to worry about getting re-elected, but they do “have to worry about people seeing them as legitimately improving the quality of life for people.” He had made these observations well before the pandemic struck in 2020
