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China’s economy feels the pressure

The long shadow of Covid-19 is impacting China’s economy, as the country struggles to meet its ambitious growth targets. Even with a new stimulus plan, the outlook for the world’s second-biggest economy is uncertain. Kimberley Long reports. 
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China’s economy feels the pressure

The economic forecast is mixed for China. The official target announced in March 2022 is for the country to hit 5.5% gross domestic product (GDP) growth for 2022. However, international agencies are more pessimistic. Goldman Sachs announced in May 2022 it was cutting its forecast for China from 4.5% to 4% for the year, with Citi similarly reducing its forecast by almost a full percentage point from 5.1% to 4.2%. 

Andrew Fennell, senior director, sovereign ratings at Fitch Ratings, says the agency does not think the 5.5% target is achievable, and has revised down the growth forecast for the year from 4.3% to 3.7%. Vivian Xue, director of financial institutions at Fitch Ratings, adds that the “increasing downside risks” will have an impact, coupled with the “cautious pace at which Covid-related restrictions have been eased”. 

This sentiment is expressed across the industry. Alicia García-Herrero, chief economist for Asia-Pacific at Natixis, is “increasingly doubtful” about the ability of the country to hit its growth target, and believes a growth rate of around 3.5% is more likely. Meanwhile, Harry Hu, senior director at S&P Global Ratings, says the agency has revised its predictions down from 4.9% to 4.2%. However, he agrees with Ms García-Herrero on the 3.5% forecast. “Should there be another Shanghai-style lockdown, this could happen,” he adds.

Chan Kung, founder of China-based think tank Anbound, is critical of the information available. Speaking in a personal capacity, he says: “We don’t think China will reach its GDP targets for the year. We don’t believe the statistical data because it does not match the real situation in China’s economy. For an open economy, we could believe the data; but with China, it is not transparent. We project 3% GDP growth for the first half [of 2022]. As the second half of the year is often crucial for GDP growth, we forecast 3% to 4% for the year overall.” 

A more optimistic opinion comes from Yu Lingqu, vice-director of the department of financial development, state-owned assets and state-owned enterprise research at the China Development Institute. When asked if the country will reach its GDP ambitions this year, he replies: “Yes. The second half will see an increase of infrastructure investment, especially in high-speed rails, subways, airports, and sea ports. Currently, epidemic control is likely to loosen in the second half, with fewer restricted areas and less intensity, while production and consumption will dramatically bounce back.”

Lockdown impact 

A major sticking point in the economic stagnation is the continued consumer uncertainty. As most of the world has moved beyond lockdowns to curb the spread of coronavirus, China is still using this as a preventative method in pursuit of its dynamic zero-Covid strategy. While at the time of writing, the city-wide lockdowns in Beijing and Shanghai have been lifted, there are still smaller, neighbourhood-wide restrictions in place in response to new cases of the Omicron variant being detected. While these smaller lockdowns may not have made international headlines, during April and May 2022 there were lockdowns of varying severity across 45 cities, affecting 373 million people. 

“The pandemic in China mainly impacted production, consumption and expectations,” Mr Yu says. “Supply chain and production in certain industries was partially interrupted due to the pandemic. Consumption dropped as a result of restricted capacity of shopping malls, stores and other venues. The private sector has been hit as well, and businesses and families have lowered their expectations and the need for investment and consumption.” 

Ms García-Herrero explains how this has impacted the economy. “Lockdowns have been felt severely. Expected GDP growth in the second quarter could be highly negative — although premier Li Keqiang is trying to avoid it in many ways, the most recent being the meeting with 100,000 cadres to make sure second-quarter GDP is not negative. This means that a negative GDP in the second quarter might be avoided, but this is really a statistical issue more than a stimulus issue.”

The meeting on May 25, 2022 saw Mr Li speak virtually with government representatives from across the country to ensure all areas are supporting the economic goals. It followed the State Council announcing 33 economic policies under the ‘Policy measure package to stabilise the economy’ document. This raft of stimulus measures covers real estate and automobile purchases to small business support. 

According to Jinny Yan, chief China economist at ICBC Standard Bank, “As lockdown restrictions are gradually lifted across cities, a sense of relief will be incredibly impactful on unleashing household consumption. That said, a prevailing risk of smaller-scale restrictions when cases flare will likely weigh on corporate investment and sentiment.”

The trend of ‘revenge spending’, whereby consumers who have been in lockdown indulge in luxury purchases or dining out, has been touted as a potential significant boost to the local economy. But any increase comes from a low starting point. For example, Shanghai’s retail spending for April 2022 was 48.3% down year-on-year. Some cities have sought to counter this by issuing shopping coupons, with more than Rmb500bn ($74.73bn) issued across the country since April 2022. 

Still, as the risk of the pandemic continues, so do concerns of further lockdowns. In its June 2022 Global Economic Outlook report, Fitch noted: “There is also a high risk of new lockdowns being imposed if outbreaks return — the authorities remain fearful of the capacity of the healthcare system to cope with a surge in infections, partly reflecting incomplete vaccination coverage of the elderly and vulnerable population.”

This is a valid concern. Large numbers of the country’s population remain unvaccinated against Covid-19. During April 2022, only 57% of over-60s had been fully vaccinated with three doses. Around 95 million people over 60 are considered to be unvaccinated or undervaccinated. 

Additionally, the domestically produced Sinopharm vaccine has lower efficacy than other vaccines, with the World Health Organization stating the vaccine provides 79% protection against symptomatic Covid-19 infection 14 days after a second vaccination. By comparison, it states the Pfizer BioNTech vaccine has an efficacy of 95%. 

“When it comes to meeting targets, it is about managing expectations,” Ms Yan says. “Given the zero-Covid policy will likely still be in place, it is unlikely any uptick in activity will have a meaningful impact on GDP growth in the coming months. With that, I think some of the softer social targets will likely be efforts to boost job creation, and ensuring food and energy security will be at the forefront. In April, official statistics suggested unemployment — and particularly youth unemployment — is rising.” 

The employment rate in China has been under pressure. While the overall rate of urban unemployment has decreased to 5.9% in May 2022, compared with 6.1% during the previous month, in certain segments of the population there is ongoing stress. For example, the government reported a 6.9% rise in joblessness in 31 major cities in May 2022, from the 5.9% seen at the peak of the initial Covid-19 outbreak in 2020.

Further, the sector most badly impacted demographic is among those aged 16 to 24 years, which increased to 18.4%. This is the highest level seen since the data was first reported in 2018. With more than 10 million graduates due to enter the Chinese labour force during 2022, there is scope for this number to climb far higher. 

Industry segments 

Support has been provided to shore up businesses affected by the prolonged lockdowns and declines in consumer activity. Much of this has been directed at specific industries. 

Finding people for some jobs has become more difficult as the closed borders have prevented overseas workers from entering the country. “Although it is not the biggest contributor to GDP, exporting corporates have received support as they tend to be more reliant on migrant workers,” says Ms Yan. “With Covid restrictions, this has made the workforce less mobile and is causing challenges.” 

The impact on some sectors has been marked, with sizeable declines in consumer and business demand. The China Association of Automobile Manufacturers’ data shows that the new passenger car and commercial vehicle market fell by a further 13% to 1,862,000 units in May 2022, compared with 2,128,000 units during May 2021. For the first five months of 2022, overall sales were down 12% on the same period the previous year. This represented a 4% decline in passenger vehicle sales and a 42% plummet in commercial vehicle sales.

“The lockdown in Shanghai had a significant impact, not only because it accounts for about 4% of China’s GDP, but because it is an important production and logistics hub,” Mr Fennell says. “The automotive industry has been particularly impacted, due to its long supply chains. This has also affected the electric vehicle industry and global brands like Tesla. In recent months, we saw a severe decline in auto sales across China, caused both by weaker consumer demand as well as supply chain disruptions that have slowed down production.” 

Emphasis has been placed on supporting the high-end manufacturing space. This dovetails with China’s bold ambitions to double its wind and solar capacity by 2025, with 33% of power to the national grid coming from renewable sources. However, it comes at the expense of other manufacturing sectors. 

Anbound’s Mr Chan says: “There has been a focus on the development of new industry sectors, such as renewable energy and semiconductor chips. These segments have received a lot of support. The central government can act like a board of directors and ask a company to operate in a certain way. I’m afraid it is one of the major reasons for China’s loss of growth. We are very pessimistic about China’s economic prospects.” 

Helping SMEs

Support packages are still being implemented to assist the most vulnerable companies. This continued financial support is opposite to what is being seen in other economies. “Compared with many other countries that are paring back fiscal support as they start to treat Covid as endemic, China is accelerating fiscal support this year,” Mr Fennell says. “Due to the government’s policy support measures, we expect a significant widening of the consolidated budget deficit. We forecast it will reach around 7% of GDP this year, up from 4.5% last year.”  

“Small businesses have been hit the hardest,” Mr Hu adds. “This is a segment without a lot of bargaining power. It is not clear if the support they have been given has been used for investment research and to improve margins, or to sustain their business and pay the bills. This segment represents about 12% of overall loans.” 

Government support has come in the form of extending terms on existing loans and increased access to funds with reduced costs. Banks have been creating their own products to support their customers through difficulties. Nanqing Li, president of WeBank, says: “WeBank has been leveraging its digital banking expertise to operate both prudentially and aggressively ... We have achieved encouraging results by using technology to help market players recover and explore new means to provide inclusive finance. With the Weiyedai product, we are striving to solve the last mile and the last step difficulties in financial services for micro, small and medium-sized enterprises (SMEs), to support their growth and to secure the bedrock for the development of the real economy.” 

However, the problems persist. China’s Small and Medium Enterprises Development Index, which is based on the results of 3000 SMEs, fell 0.1 point to 88.2 during May, compared with the previous month. It is the fourth consecutive month of decline and the lowest result since 2021. The sub-index for costs was in contraction, indicating rising costs. 

It is debatable how effective the support being provided is. “Companies have been supported through the evergreening of bank loans, with very little fiscal support,” Ms García-Herrero says. “This is why SMEs are really under the weather, and we should expect a domino effect of small companies defaulting unless additional or targeted measures are introduced, such as subsidies.” 

The Chinese economy has work to do if it wants to maintain the growth levels seen before the pandemic. With predictions that there will be no change to the zero-Covid policy until after the National Congress meeting in November, the GDP growth target for 2022, at least, may be difficult to reach. 

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Kimberley Long is the Asia editor at The Banker. She joined from Euromoney, where she spent four years as transaction services editor. She has a BA in English Language and Literature from the University of Liverpool, and an MA in Print Journalism from the University of Sheffield. Between degrees she spent a year teaching English in Japan as part of the JET Programme.
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