China’s economic distress deepens as lockdowns drag on

HONG KONG—China’s economy sank deeper into a Covid-induced stagnation last month, raising questions about whether Beijing’s planned stimulus measures can stave off a prolonged recession.

Consumer spending and factory output slumped in April, while growth in infrastructure investment, which Beijing was counting on to fuel growth this year, slowed sharply, the National Bureau of Statistics reported on Monday. from China.

Meanwhile, China’s overall unemployment rate rose to a two-year high of 6.1%, further evidence of the economic damage unleashed by the country’s strictest pandemic containment measures in more than two years.

While activity could pick up if lockdowns are finally lifted, the damage from China’s commitment to eradicate covid outbreaks is ripping through the economy and lingering. The question now is whether policymakers in the world’s second-largest economy will be able to soften the blow with fiscal and monetary policy tools.

China’s stimulus measures since the pandemic first broke out have focused on the supply side. Beijing’s reluctance to directly support households and its continued Covid restrictions have sapped the power of consumer demand to drive the economy, economists say.

Infrastructure spending, another favorite tool of Beijing policymakers that leader Xi Jinping has promoted in recent weeks, may not work as well as in the past, due in part to current debt levels, Stephen Roach said. , economist and professor at Yale University. .

“[China] it is facing some extraordinary headwinds that I think its leadership is not responding to effectively,” said Mr. Roach, former chairman of Morgan Stanley Asia.

The hardest-hit sector of China’s economy, according to Monday’s data, was consumer spending. Retail sales in April fell 11.1% from a year earlier, the second straight monthly drop and the biggest contraction since March 2020.

In Shanghai, a city-wide lockdown meant not a single car was sold last month, the Shanghai Automobile Sales Association said on Monday.

Vegetable shoppers in Beijing, where lockdown fears have sparked bouts of panic buying in recent weeks.


Photo:

Li Xin/Zuma Press

Covid-19 restrictions could also be felt in China’s manufacturing sector, where difficulties in getting workers at production plants, combined with declining overseas demand for Chinese goods, have brought production to a standstill and disrupted supply chains. supply.

Industrial production in April fell 2.9% from a year earlier, after a 5% rise in March. Production in the auto sector plunged 43.5% by volume as Covid swept through key production hubs in and around Shanghai and the northeastern province of Jilin, overwhelming the efforts of manufacturers including Tesla. Inc.

— whose factory in Shanghai is the world’s largest — keeps operations running by having workers live on-site.

Year-on-year growth in fixed asset investment, including real estate and infrastructure projects, slowed to 6.8% during the first four months of the year from 9.3% in the first quarter.

The surveyed urban unemployment rate, China’s main measure of unemployment, exceeded the official target of 5.5% for the second consecutive month in April, rising to 6.1%, the highest since 6.2% in February. 2020. Unemployment among people aged 16 to 24 increased to 18.2%, the highest level since before the pandemic.

Fu Linghui, an official with China’s bureau of statistics, said on Monday that the challenges facing the economy have “exceeded expectations”, though he expressed optimism that the difficulties will be short-term.

On Monday, Citigroup cut its second-quarter GDP growth forecast to 1.7% from 4.7%, and its full-year forecast to 4.2% from 5.1%.

As the outlook deteriorates, several leading Chinese economists and academics, speaking at a forum in Beijing on Saturday, called for a more aggressive policy response.

“We have reached a point where we must use policies to save the economy at all costs,” said Huang Yiping, an economics professor at Peking University and a former central bank adviser, according to an official transcript.

Zhaopeng Xing, senior China strategist at investment bank ANZ, said China’s economy faces two challenges: the room for monetary easing is shrinking and business and consumer confidence is deteriorating. A rapid rebound similar to the one that followed Wuhan’s lockdown in 2020 is “almost impossible,” she said, given the higher transmissibility of the Omicron variant of the coronavirus.

Despite the censorship, videos shared online show growing despair and anger over prolonged Covid-19 lockdowns in China’s economic capital Shanghai, where officials are trying to solve problems including food shortages while the country’s strict pandemic policy is doubled. Composite photo: Emily Siu

The worsening economic outlook was not enough for China’s central bank to cut interest rates on Monday, as many economists had expected. Despite subdued consumer inflation, economists say there is limited room for monetary easing as rate hikes by the Federal Reserve fuel concerns about capital outflows from China.

The People’s Bank of China, however, allowed banks to cut mortgage rates for first-time home buyers on Sunday, in a move to prop up a slumping property sector. Many economists, however, are skeptical that such moves can reverse a year-old government-induced spiral.

New home starts and home sales in April fell 44% and 47%, respectively, from a year earlier, worse than the drop in March, official Chinese data released on Monday showed.

The biggest challenge facing Beijing, economists say, is stimulating demand even as businesses and consumers grow more pessimistic, with top Chinese leaders reaffirming their insistence on stamping out all Covid infections.

Reflecting declining investor appetite, medium- and long-term corporate loan growth slowed considerably in April relative to March. Meanwhile, total loans to households fell 1.7% as demand for new mortgages and consumer debt contracted.

Unlike their counterparts in most developed economies, including the US, policymakers in China since the start of the pandemic have avoided handing out cash or increasing unemployment benefits to households. Instead, Beijing has said it will funnel cheaper loans to businesses and offer up to 2.5 trillion yuan, equivalent to $368 billion, in tax rebates to companies and business owners this year.

“The real weakness is on the demand side, but almost all the economic measures put in place are supply-side measures,” said Michael Pettis, a finance professor at Peking University.

Shen Jianguang, chief economist at JD.com, questioned the effectiveness of existing policy responses and called on the government to distribute consumer coupons to boost demand.

“Few companies will benefit from tax cuts if their revenue and profit growth suffer drastically,” he told the Peking University forum on Saturday.

write to Stella Yifan Xie at [email protected]

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