The closure of Shanghai, a city with a population of 25 million, has had a significant impact on China’s economic performance. However, comparing this spring to last spring does not provide an accurate picture, according to Diana Choyleva, the chief economist at Enodo Economics in London.
Analysts suggest that a more accurate measure of the economy is to compare the second quarter of 2023 with the previous three months, after the “zero Covid” policy was discontinued. By this measure, output only increased by 0.8 percent in the second quarter compared to the first quarter. Projected for a year, this translates to a growth rate of slightly over 3 percent, a significant drop from the 9 percent growth in the first quarter.
China’s economy is displaying several warning signs. Exports have plummeted, especially in June, and weak spending is pushing the country towards deflation. Housing prices have been declining, affecting both smaller and larger cities. Investment has also stalled, particularly from foreign companies, and local governments are experiencing cash shortages.
Further data indicates that industrial production and retail sales have only shown modest increases, while exports have suffered a substantial decline. Companies in the United States and Europe, which previously ordered large amounts of inventory from Chinese factories, have now reduced their orders, impacting China’s exports. Some companies are even relocating their supply chains away from China.
Furthermore, the incomes of many Chinese citizens have been severely affected by the pandemic, resulting in high unemployment rates among 16-to-24-year-olds. In light of the economic struggles, former finance minister Lou Jiwei has called for increased government spending to stimulate the economy.
Despite these challenges, there are a few positive indicators. Unemployment among individuals aged 25 to 59 remains low, and car sales have continued to rise. Fu Linghui from the National Bureau of Statistics stated that consumer prices are not a concern and that there is no deflation in Chinese society.
Why It Matters
China’s influence on global growth is significant. While the country has aimed to increase self-reliance in recent years, it remains the largest importer of various commodities. However, there are indications that Chinese households are hesitant to spend, including falling prices of staple goods and a declining housing market, which has traditionally been a wealth-building avenue.
The future demand for goods and services in China will depend on policy decisions made by the government. Some economists, like Lou Jiwei, believe that a spending program is necessary to create jobs and stimulate consumer activity. However, the country’s substantial debt, especially at the local government level, poses challenges to implementing such measures. Monetary policy actions, such as interest rate cuts, are being relied upon instead.
“If there is no policy response, including monetary response, then I don’t expect much of a recovery,” said Wang Dan, the chief economist at Hang Seng Bank China.
Li You contributed research.
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