Consequences of the pandemic: China’s economy is shrinking

Beijing The scale of the economic damage caused by China’s blockades is likely to become apparent on Friday. Subsequently, the National Statistical Office will publish growth data for the months April-June and many other economic indicators. The data will also shed light on whether government leaders need to pass additional stimulus packages to stabilize the recently hit economy.

Economists expect the world’s second-largest economy to contract by two percent in the second quarter compared to the previous quarter. Compared to the same period last year, this would correspond to an increase of 1.2%. and would be the lowest since the sharp slump in Q1 2020 following the first pandemic outbreak.

In addition to GDP data, June’s data on unemployment, retail sales, house prices, industrial production and loans should also be revealing. Because it will show if and how quickly the economy recovered from the extensive blockades that also hit metropolises like Shanghai. For example, experts expect a significant increase in industrial production as many factories have restarted and are now processing backlogs.

However, this is not clear. Since recently, the number of new Covid infections in China has increased significantly. The highly contagious BA.5 variant appears to be spreading rapidly. Several cities have tightened restrictions on the crown again significantly, such as the industrial metropolises of Guangzhou and Xi’an.

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In Shanghai, residents of individual neighborhoods have been asked to stock up on food and medicine for two weeks, which raises concerns about another blockade. According to the Bloomberg news agency, some 30 million Chinese are currently suffering from some form of traffic restriction under Covid’s zero policy.

The constant danger of being locked up is increasingly causing reluctance and uncertainty among the population and businesses. You save instead of investing and consuming. At the same time, it is exacerbated by the smoldering crisis in the real estate market, which has recently contributed to around one-third of economic growth.

A tailwind is not expected from exports

Contrary to the first economic downturn associated with the pandemic in early 2020, exports are unlikely to help the Chinese economy recover rapidly this time. At that time, the high demand for electrical home office products from the rest of the world, plagued by the blockage, caused a particular boom in China.

Chinese customs authorities reported strong export growth of almost 18 percent in June compared to the same month last year. However, experts warn against erroneous conclusions: monthly data is only a sign that port and inland logistics are recovering from the blockades, write ING Bank analysts in the current classification. The backlog that resulted from closings is now processed there. As the authors claim, so far nothing indicates a stronger demand from abroad.

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In view of the economic difficulties on the important sales markets, one should rather expect a decline in demand from abroad. If the US and Europe fall into recession, China will face “stiff adversities,” warned Rohit Sipahimalani, investment director at Singapore’s Temasek sovereign wealth fund. This and re-outbreaks in important economic regions such as Shanghai and Guangzhou are increasing pressure on the Chinese government to support the economy more than before.

Recently, there are increasing signs that the government is considering significantly increasing its stimulus packages. A state-owned infrastructure fund worth 500 billion renminbi, or the equivalent of approximately $ 74 billion, is planned. This was reported by the Reuters news agency last week with regard to insiders. So far, infrastructure investments worth $ 45 billion have been announced.

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In addition, the Beijing government apparently wants to empower provincial governments to raise additional $ 220 billion in special bonds on capital markets, including for infrastructure investments. Until now, they only had to exhaust the full-year emission cap of $ 540 billion in the first half of the year, which also happened.

Economists are calling for additional help for businesses and consumers

In the past few weeks, there have been calls for more political support. So far, with the exception of subsidies for the purchase of cars and household appliances, the state management has relied primarily on the proven recipe for infrastructure investments. However, experts doubt whether this is enough. Michael Pettis, a professor of finance at Peking University, has long advocated strengthening the demand side rather than increasing supply.

China will have to take “unconventional measures” in the second half of the year to meet its growth target of around 5.5 percent, Feng Qiaobin of the Development Research Center, a State Council research institution, told the state-run Economic Daily.

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However, most economists assume that the goal is difficult to achieve. The International Monetary Fund currently forecasts an increase of 4.4 percent for the full year. Some forecasts of other analysts are even lower, such as the Japanese investment bank Nomura with 3.9 percent.

Small business aid in particular is “still not enough,” former Finance Minister Lou Jiwei said at a Saturday conference by the renowned business magazine Caixin. He suggested that central and local government budget deficits could be increased if needed to provide more support to businesses.

Zhang Bin of the Institute of World Economy and Politics at the Chinese Academy of Social Sciences (CASS), the state-owned think tank, also advocates stronger support for monetary policy: The interest rate is the most important price lever for macroeconomic operations, the conference emphasized. It could also alleviate the problems of heavily indebted property groups. Zhang warned of the long-term negative effects of not properly addressing the current problems in the Chinese economy.

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