The economy continues to suffer from the pandemic strategy

When the Beijing Politburo, ultimately the highest decision-making body of the Communist Party, meets for its quarterly meeting, economists around the world sit down and take notice. After all, top party cadres set the economic direction for the coming months. But while self-confidence and optimism have traditionally prevailed in the plenum, this time the 25-member Politburo has attracted attention in a much more modest, even self-critical tone.

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For the first time, the government saw an inevitable reality that has long been clear to outside observers: China will not meet its growth target for this year. With the “about 5.5 percent” you’ve been aiming for, you don’t want to know anything else. Instead, it is said almost shyly that “the best possible result” must be achieved.

Politburo meeting in the shadow of the zero Covid strategy

No doubt: even in the third year of the pandemic, the Politburo meeting was overshadowed more than ever by Covid’s zero strategy. The staff in Beijing made it clear that this was still a top priority: there was still a need to “prevent and control outbreaks of infection immediately” and “carelessness” could not be tolerated.

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Moreover: the link between virus prevention and economic growth “has to be considered” comprehensively, in the long term and especially from a political point of view “. So between the lines it means: Zero Covid remains the measure of everything in China, to which – in case of doubt – economic interests must also be subordinated.

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For European companies operating in the Chinese market, this should be a sobering sign. Eventually, the exit strategy gets far from all the ongoing border closures and unpredictable blockades that undermine all business planning and investment security. For example, the Politburo did not mention the goals of vaccination.

The economic situation continues to deteriorate

The economic situation in the People’s Republic of Poland – largely due to zero Covid – is now more tense than in decades. Youth unemployment has risen to an all-time high, with one in five Chinese aged 16 to 24 unemployed in cities alone. In addition, the crisis on the real estate market is deepening in the face of an increasing number of insolvent developers. But the Politburo cannot come up with any permanent prospects for a solution in this area: instead it shifts responsibility to local governments. They would have to ensure that the housing projects are also completed as planned. It doesn’t sound particularly encouraging.

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With the first interest rate hike in eleven years, the European Central Bank is deeply interfering in our entire lives. Finally, there is the prospect of interest on credit balances when investing in savings accounts. At the same time, credits and loans are becoming more expensive to an unprecedented degree.

Andrew Polk of the consulting firm “Trivium China” adequately rated the July Politburo meeting as “failed”. No new ideas and solutions were presented: “All economic difficulties that China faced in the first half of the year continued in the second half of the year,” summed up Polk on his Twitter account. The country is likely to be able to avoid a second catastrophic blockade, such as in Shanghai in April and May, but the economic recovery will by no means be linear.

China actually needs 6 percent. economic growth – but it is 0.4 percent.

So far, at least, we’ve felt nothing more than an uncertain turn. In the second quarter, China’s gross domestic product grew by just 0.4 percent – and that was before corona infection and the inevitable blockages had deteriorated somewhat recently. However, a thriving country like China still needs a growth rate of around 6 percent in order for the tight labor market to offer young people sufficient prospects. This summer alone, almost 11 million university graduates apply for the best-paid and stable job.

Pandemic and us

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Until recently, China was able to rely on a proven recipe in times of crisis, but in recent years it has become obsolete: massive investments in infrastructure and construction work bring ever lower returns and hardly bring additional economic benefits. In the opinion of many economists, structural reforms would really help if they could wake up sluggish domestic consumption – the Achilles’ heel of the Chinese economy. However, an economic paradigm shift that increases people’s disposable income and says goodbye to an export-driven trade surplus would ensure a painful transition, at least in the short term.

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However, this is precisely what the head of state, Xi Jinping, cannot afford at the moment. At the autumn 20th Congress of the Communist Party, the 69-year-old faces what may be the most important phase of his career so far. Xi will announce his third term, which is not controversial in China as well – and by then he will subordinate all aspects of social stability.

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