China’s economy is in slump as covid policy takes its toll

As countries around the world stumbled on the pandemic headwind, China often stood at a distance, seemingly impervious to financial pressures that sapped growth.

But now, swept up in its commitment to contain the spread of Covid-19 with widespread lockdowns and mass quarantines, China has experienced one of its worst quarters in years, threatening a global economy heavily dependent on Chinese factories and consumers.

For the country’s ruling Communist Party, the downturn could put additional pressure on Beijing at a sensitive time. China will hold its party congress later this year. A booming economy and growing wealth were part of the bargain Chinese citizens accepted in exchange for living under authoritarian rule.

But the lockdowns, a staple of Beijing’s zero-covid policy, have increased the risk of instability — both socially and economically.

China’s National Bureau of Statistics said Friday that the economy grew 0.4 percent in the second quarter from a year earlier, worse than some economists’ expectations. It was the lowest growth rate since the first three months of 2020, when the country was effectively shut down to combat the early stages of the pandemic, and the 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 all-time high. The housing market is still in shambles and small businesses are bearing the brunt of consumer spending weakness.

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

This is an unwanted complication in a year when China is trying to radiate unshakable strength and stability. At the party congress, Xi Jinping, the country’s leader, is expected to reach another five-year term, further strengthening his grip on power.

In May, China’s Prime Minister Li Keqiang called an emergency meeting and sounded the alarm about the need to boost economic growth for more than 100,000 corporate and local government officials. The stark warning cast doubt on China’s ability to meet its previous growth target of 5.5 percent for the year.

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

But China is no longer growing by leaps and bounds. The Covid restrictions have been combined with policies implemented in recent years — such as tackling real estate speculation and curtailing the power of China’s tech giants — to exacerbate the slowdown. So far this year, Starbucks, Nike and Hilton have all warned that weak spending in China had pushed sales down.

While much of the world has learned to live with the coronavirus, China has adopted a zero-covid policy to do everything necessary to prevent infection. Under that policy, residents of an entire block of flats could be locked up at their homes for weeks if a single tenant was infected. A few positive cases can lead to a whole area of ​​a city being shut down.

Even now that the toll of that policy has become apparent, Mr Xi has not flinched. He has said he is willing to endure some temporary economic pain to keep Chinese citizens free from Covid.

The most recent economic slump struck in April and May, when Shanghai, China’s largest city, went into lockdown for nearly two months and the impact rippled through the economy. Office buildings were closed and workers had to stay at home. Hundreds of millions of consumers were locked up across China, leaving shops, restaurants and service providers without customers.

Zheng Jingrong, a Beijing store owner that sells imported handmade clothing, said she had typically sold 150 to 200 items in a month before the pandemic. She sold 20 in May. Her regulars don’t come by anymore, she says, and people generally don’t like to leave the house. Each year of the pandemic was “worse than the year before,” Ms Zheng said.

And the problem is not limited to her clothing store. Ms Zheng said there were more than 300 shops in the same neighborhood as her shop in Gulou, a maze of streets and alleys that once teemed with food stalls, cafes and bars. She estimated that 20 percent of those businesses closed or had closed.

“As China started to flourish and develop from the 1980s, the economy was always going up,” said Ms. Zheng, who has been running the store for 15 years. “Now it’s clearly going down.”

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

Japanese securities firm Nomura estimated that as of Monday, 247 million people in 31 cities in China had been shut down in some way, 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 urged local authorities to take measures to ensure jobs during the lockdowns. And yet, with so many small and medium-sized businesses suffering financially, the government is struggling to control rising unemployment.

In June, the unemployment rate was 5.5 percent — an improvement from April and May, but close to the highest level since China began reporting the numbers in 2018. For job seekers aged 16 to 24, including recent graduates, the unemployment rate was more than three times higher at 19.3 percent.

James Fu quit his job as a landscape designer for a property developer last month — a grueling job that he was beginning to hate. But now he has to deal with the fear of getting a job in a tough job market, especially in real estate.

Mr Fu, 28, said fewer jobs were available at real estate companies as companies struggled financially or used the downturn to justify staff and cost cuts. And as the pool of jobs has shrunk, he said, the requirements to get one have risen.

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

In addition to 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 by savers demanding their money back from four rural banks after their assets were frozen. The protests turned violent when authorities sent guards to break up the demonstration.

Weakness in the real estate market has also led to public outcry. A growing number of property owners who bought houses before they were built have stated to banks and regulators that they will not pay their mortgages, according to Chinese media.

When China took steps to curb real estate speculation in 2020, it sent many property developers into a debt spiral, causing new home prices to fall for the first time in years and boost consumer confidence, many of whom are investing their households’ savings in real estate. had plowed well.

Responding to concerns over mortgage repayments, China’s banking and insurance regulator said it would work with the entire central government and local authorities to ensure that buildings are completed, jobs are saved and “stability” in the real estate sector is guaranteed, the state said. -running television.

Claire Fu research contributed.