China’s economy is in bad shape and could stay that way for a while | CNN Business


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China is ravaged by serious economic problems. Growth stagnating, youth unemployment at record high, the housing market is collapsingand companies struggle with recurring supply chain headache.

The world’s second-largest economy is grappling with the effects of severe drought and the massive real estate sector is suffering the effects of over-indebtedness. But the situation is getting much worse as Beijing adheres to a rigid zero covid policyand there is no sign that this year will change.

in the past two weeks, eight megacities have gone into full or partial lockdown. Together, these vital production and transportation centers are home to 127 million people.

At least 74 cities nationwide had been shut down since late August, affecting more than 313 million residents, according to CNN calculations based on government statistics. Goldman Sachs last week estimated that cities hit by lockdowns account for 35% of China’s gross domestic product (GDP).

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

“Beijing appears willing to bear the economic and social costs of its zero-Covid policy, as the alternative – widespread infections along with associated hospitalizations and deaths – poses an even greater threat to the government’s legitimacy,” he said. Craig Singleton, senior China fellow. at the Foundation for Defense of Democracies, a think tank in DC.

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

“Major policy changes ahead of the party congress seem unlikely, although we could see some policy easing in early 2023 after Xi Jinping’s political future is assured,” Singleton said.

“Even then, the party lacks the time and available policy tools to address 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, Greater China’s chief economist for ANZ Research. Local governments will be “more likely to prioritize zero-Covid and eradicate the virus outbreaks” as the party congress approaches, he added.

The tightening of Covid restrictions will hit 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 doesn’t bode well for China’s growth either, Yeung said, as dwindling demand from US and European markets will weigh on Chinese exports.

He now expects China’s GDP to grow by just 3% this year, well above 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 after the pandemic, Beijing is sticking to its extreme approach to the virus with forced quarantines, massive mandatory tests and rapid lockdowns.

The policy was considered successful in the early stages of the pandemic. China managed to keep the virus at bay in 2020 and 2021 and prevent the high number of deaths many other countries suffered, while build a speedy recovery next record GDP contraction. Bee a ceremony in 2020Xi stated that China’s success in containing the virus was proof of the Communist Party’s success superiority over western democracy.

But the premature declaration of victory has continued to haunt him again, as the highly transferable Omicron variant makes zero-covid policies less effective.

Giving up zero-Covid, however, doesn’t seem like an option for Xi, who has repeatedly placed more emphasis this year on beating the virus than on saving the economy.

In a trip to Wuhan in June, he said China should maintain its zero-covid policy “even if it could hurt the economy.” Bee a leadership meeting in Julyhe reaffirmed that approach and urged officials to look at the relationship between virus prevention and economic growth “from a political point of view.”

“Beijing has tried to use its zero-covid policy as proof of the strength of the party, and thus, by extension, Xi Jinping’s leadership,” Singleton said.

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

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

While Beijing looks unwavering on its zero-Covid strategy, The government has rolled out a series of incentives to boost the faltering economy, including: a one trillion yuan ($146 billion) package unveiled last month to improve infrastructure and reduce power shortages.

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

Recent data suggests that the Chinese economy could face another dismal performance in the third quarter. GDP expanded by only 0.4% in the second quarter of a year earlier, decelerating sharply from a growth of 4.8% in the first quarter.

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

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

The Chinese labor market has deteriorated in recent months. The latest data shows that the unemployment rate among 16- to 24-year-olds hit a record high of 19.9% ​​in July, the fourth consecutive month of record-breaking.

That means China now has about 21 million unemployed youth in cities and towns. Unemployment in rural areas is not included in the official figures.

“The most worrying problem is jobs,” says ANZ’s Yeung, adding that youth unemployment could be as high as 20% or more.

Other economists say more jobs are likely to disappear this year as social distancing measures hurt the hospitality industry and retail, in turn increasing pressure on manufacturers.

The deepening downturn in the real estate market is another major impediment. The sector, which accounts for a staggering 30% of China’s GDP, has been crippled since 2020 by a government campaign to curb reckless borrowing and curb speculative trading. House prices have fallen, as have the sale of new houses.

While there could be a relaxation of zero-covid rules in 2023, housing policy may not look very different after the party congress.

“The economy is unlikely to repeat its previous high growth rate of 5.5% or 6% in the next two years,” Yeung said.

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