China’s economy is in bad shape and could stay that way for some time

Editor’s note: A version of this story appeared in CNN’s news bulletin Meanwhile in China, a tri-weekly update exploring what you need to know about the country’s rise and its impact on the world. Register here.

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China is in the throes of serious economic problems. Growth has stalled, youth unemployment is at an all-time high, the housing market is collapsing, and businesses are grappling with recurring supply chain headaches.

The world’s second largest economy is grappling with the impact of a severe drought and its vast real estate sector is suffering the consequences of excessive debt. But the situation is made much worse by Beijing’s adherence to a rigid zero Covid policy, and there is no indication that will change this year.

In the past two weeks, eight megacities entered total or partial closures. Together, these vital manufacturing and transportation centers are home to 127 million people.

Across the country, at least 74 cities had been closed since late August, affecting more than 313 million residents, according to CNN calculations based on government statistics. Goldman Sachs estimated last week that cities affected by the shutdowns accounted for 35% of China’s gross domestic product (GDP).

The latest restrictions demonstrate China’s uncompromising attitude to eradicate the virus with the strictest control measures, despite the damage.

“Beijing appears willing to absorb the economic and social costs that flow from its zero Covid policy because the alternative – widespread infections and corresponding hospitalizations and deaths – poses an even greater threat to government legitimacy,” he said. said Craig Singleton, senior China researcher. at the Foundation for Defense of Democracies, a DC-based think tank.

For Chinese leader Xi Jinping, maintaining that legitimacy is more vital than ever as he seeks to be selected for an unprecedented third term when the Communist Party meets for its most important congress of a decade next month.

“Major policy changes before the Party Congress seem unlikely, although we could see some policy easing in early 2023 after Xi Jinping’s political future has been secured,” Singleton said.

“Even then, the Party lacks both the time and the political leverage available to deal with many of the most pressing systemic threats to the Chinese economy,” he added.

The economy will continue to deteriorate in the coming months, said Raymond Yeung, chief Greater China economist for ANZ Research. Local governments will be “more inclined to prioritize zero-Covid and quell virus outbreaks” in the run-up to the party congress, he added.

Tighter Covid restrictions will affect consumption and investment during China’s “Golden September, Silver October”, traditionally the peak season for home sales.

In the meantime, a sharp slowdown in the global economy also does not bode well for Chinese growth, Yeung said, as weaker demand from the US and European markets will weigh on Chinese exports.

He now expects China’s GDP to grow just 3% this year, well missing Beijing’s official target of 5.5%. Other analysts are even more bearish. Nomura lowered its forecast to 2.7% this week.

More than two years into the pandemic, Beijing is sticking to its extreme approach to the virus with enforced quarantines, mass mandatory testing and instant lockdowns.

The policy was deemed effective early in the pandemic. China has managed to keep the virus at bay in 2020 and 2021 and avoid the large number of deaths suffered by many other countries, while building a rapid recovery from a record contraction in GDP. At a ceremony in 2020, Xi proclaimed that China’s success in containing the virus was proof of the Communist Party’s commitment. superiority on Western democracy.

But the premature declaration of victory came back to haunt him, as the highly transmissible variant of Omicron makes the zero-Covid policy less effective.

However, abandoning zero-Covid does not appear to be an option for Xi, who this year has repeatedly emphasized defeating the virus rather than rescuing the economy.

During a trip to Wuhan in June, he said China must maintain its zero Covid policy “even if it could hurt the economy”. At a leaders’ meeting in July, he reaffirmed that approach and urged officials to look at the relationship between virus prevention and economic growth “from a political perspective.”

“Beijing has sought to portray its zero Covid policy as evidence of the strength of the Party, and therefore, by extension, of Xi Jinping’s leadership,” Singleton said.

Any change in approach may not come until next year, and even then it’s very likely to be very gradual, said Zhiwei Zhang, chairman and chief economist of Pinpoint Asset Management.

“It will be a long process,” he said, adding that Hong Kong where quarantine and testing rules for visitors have recently been relaxed could be “an important leading indicator of what will happen on the continent”.

While Beijing seems unwavering on its zero-Covid strategy, the The government has rolled out a series of stimulus measures to boost the flagging economy, including a trillion yuan ($146 billion) package unveiled last month to improve infrastructure and ease power shortages.

The government is trying to achieve “the best possible outcome” for economic growth and jobs while sticking to zero-Covid, but it’s “very difficult to balance the two goals,” Yeung said. ANZ.

Recent data suggests that the Chinese economy could be heading for another dismal performance in the third quarter. GDP grew only 0.4% in the second quarter compared to the previous year, slowed sharply from 4.8% growth in the first quarter.

Official and private sector surveys released last week showed China’s manufacturing industry contracted in August for the first time in three months, while growth in services slowed.

“The picture is not a pretty one as China continues to battle the largest wave of Covid infections yet,” Nomura analysts said in a research report on Tuesday.

The Chinese labor market has deteriorated in recent months. The most recent data showed the unemployment rate for 16-24 year olds hit a record high of 19.9% ​​in July, the fourth month in a row that it has broken records.

This means that China now has around 21 million unemployed young people in cities and towns. Rural unemployment is not included in official figures.

“The most worrying issue is employment,” said ANZ’s Yeung, adding that youth unemployment could climb to 20% or more.

Other economists say more job losses are likely this year as social distancing measures hurt the restaurant and retail sectors, which in turn puts pressure on manufacturers.

The worsening of the slowdown in the real estate market is another major drag. The sector, which accounts for up to 30% of China’s GDP, has been crippled by a government campaign since 2020 to curb reckless borrowing and curb speculative trading. Real estate prices have fallen, as have sales of new homes.

While there may be a relaxation of zero-Covid rules in 2023, housing policy may not be much different after the party convention.

“We probably won’t see the economy repeat the previous strong growth of 5.5% or 6% over the next two years,” Yeung said.

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