Is Chinese economy on the cusp of recession?
China's economy is slowing down, with its annual growth rate falling to 0.4% in the April-June period, its lowest since 1992. The country's recovery is being hindered by the combination of COVID and the falling property market. Since the outbreak of COVID-19, China's President Xi Jinping has been implementing a comprehensive strategy to address the issue. His government has been carrying out extensive surveillance and has been implementing wide-scale lockdowns in various cities.
Although the approach may have seemed excessively strict, it has been regarded as the country's "winning" strategy against the disease. The emergence of the highly contagious omicron variant in 2021 and 2022 disrupted the country's "winning strategy." Cities such as Shenzen, Shanghai, and Xi'an, which are known for their high-profile industries, went into lockdowns in March and April. The implementation of the lockdowns highlighted the negative effects of China's isolation policy. In Shanghai, the daily infections exceeded 20,000, and the city's 24 million residents were restricted from shopping for essential items. Although the lockdown ended on June 1, the effects of the two-month period were still significant.
Economic Activity Shut Down
The implementation of the lockdown in Shanghai severely affected the city's economy. The region's major transportation infrastructure, such as container ports and roads, were also disrupted. This affected the Chang Jiang Delta, which is the center of China's economy. The closure of the port in Shanghai, which is one of the world's largest container ports, affected the global economy. It is a vital link in the Chinese economy and carries various products, such as electronic devices and cars. In Japan, the disruptions in the supply chain caused manufacturers to reduce their operating hours. In response to the situation, the Chinese government issued a series of policies aimed at improving the country's supply chain. One of these included a list of 666 companies that were eligible for preferential treatment. These companies, which include major automobile and medical device manufacturers, were able to receive the treatment.
After the initial effects of the lockdown were mitigated, shipping and factory production volumes started to increase steadily in May. However, the effects of the lockdown were too severe to be easily resolved. According to the statistics bureau of China, the country's gross domestic product grew by a mere 0.4% during the April-June 2022 quarter. This was a significant slowdown from the 4.9% growth recorded in the previous quarter. The slowdown in the country's economy affected the east China region, which is the country's most important region. In Shanghai, the economy contracted by 13.7% during the first six months of the year. Other regions such as Jiangxi and Fujian recorded negative growth rates of 0.1% and 1.1%, respectively. Although the capital Beijing did not implement the same measures as the lockdown in Shanghai, it still experienced a 2.9% economic decline.
Supply Chain Affected
Shanghai's lockdown was so strict that other countries might have regarded it as "bizarre." The process used to allow the COVID-19 pandemic to become so serious was also regarded as "manmade." Let's now take a look at how these events affected the global economy. The effects of the lockdown on Chinese and foreign companies will vary depending on their industry. For instance, in electronics, China has a vast industrial chain that is capable of handling the production of parts and materials that are used all around the world. This makes relocating production overseas a daunting task. One of the most important factors that affected the global economy was the requirement for manufacturing goods in China. Although the lockdown caused some industries to suffer, such as the automobile industry, it is unlikely that they will be able to relocate their production facilities outside of the country due to the COVID zero policy.
However, in certain industries, such as the tech industry, which are not dependent on China, the lockdown has prompted companies to start moving their operations outside of the country. These companies can do so if the conditions are right, such as the availability of skilled labor and the rising cost of production. The latest series of events, such as the outbreak of the COVID-19 pandemic, has once again highlighted the negative effects of doing business in China. After the lockdown was lifted, a significant number of foreign residents started to leave the country. Even after the government's insistence that its COVID zero policy is still in place, the heavy price that the country has paid for this incident has forced it to take a more cautious approach in the future. In certain industries, such as those that are not heavily affected by China's efforts, the continued outbreaks could accelerate the departure of foreign companies from the country.
China's despondency
In the June 2020 quarter, the Chinese economy contracted by 1.9%. The property market's slump, which started in the second half of last year, has also had a negative effect on the country's overall economy. If the COVID zero outbreak was an acute illness, the country's property market problems would have been chronic. In response to the economic crisis caused by the COVID-19 pandemic, the Chinese government launched an economic package in the second quarter. However, this was not able to prevent the country from experiencing a renewed property bubble. In response to this, the government launched a series of measures to restrict the lending activities of property developers.
Similar to the measures that were implemented during the Shanghai lockdown, the government's new measures severely affected the property market. In the second half of 2021, the entire market fell into recession. After realizing that the country's financial situation was getting out of control, the government started to implement a series of measures to address the issue at the end of last year. Some of these include allowing local governments to relax their home lending requirements. However, despite the government's efforts, the legacy of its earlier over-zealous approach remains a serious concern.
In the first six months of 2022, residential property sales were down 26.6% from the same period in the prior year. The total value of property sales also decreased by 31.8%. New construction permits were also down 35.4%, while land purchases dropped by 48.3%. The slump in the property market has been estimated to have contributed to one-quarter of China's economic growth. The real estate slump has also resulted in two negative flow-on effects: First, it has caused the income from land sales to plummet. In the first six months of this year, the income from the sales of public land, which is a major contributor to the provincial governments' total income, decreased by 31.4%. This is a significant issue for the provincial governments as they are currently experiencing a reduction in the value added tax revenue. At the same time, they are spending heavily on public works projects to boost the country's economy. These developments are expected to have a negative impact on the financial position of the local governments, as China's second half of 2022 is still expected to be a crucial time for the country's growth.
As the worsening cash flow situation of the developers has also caused the construction of several pre-sold blocks of apartments to be stopped. This has caused many buyers to refuse to pay their mortgages, which could cause the banks to lose money on these loans. Inspite of the government's efforts to address the real estate slump, the number of Chinese households that have their own homes has increased significantly. Any significant decline in the value of property could cause the public to feel frustrated and discontent. If the government continues to fail to address the issues related to the property market, the country's property market could become unstable. The government's efforts to address the issue, the Chinese government still relies on the property market to boost the country's economic growth. This has caused the prices of real estate to increase. This gap between the haves and the have-nots has become a major issue.
China in second half of 2022
The path that President Xi Jinping and his administration follow will not be able to satisfy all of their expectations. There are many obstacles that they will face as they enter their third term. President Xi Jinping wants to avoid the country's economic growth falling below 3%. However, he also noted that the government would only implement monetary policy if it can achieve a 2% or 3% growth rate. Despite the positive effects of fiscal expansion, some experts believe that this approach could exacerbate long-term issues such as excessive debt. The Chinese government's goal of achieving a growth rate of 5.5% is becoming increasingly difficult to achieve
Conclusion
The housing market crisis and covid-zero policies have put China's growth behind that of other Asia-Pacific countries, according to World Bank projections. The International Monetary Fund lowered its growth outlook for East Asia and Pacific countries to 3.2% in its bi-annual report. It attributed the decline in growth to the region's economic troubles in China, which accounts for 86% of the region's output. And the World Bank projects that China's gross domestic product will grow at a rate of just 2.8% in 2022. Its neighbors are expected to grow at an average of 5.3%. For the first time since 1990, China's growth has lagged behind that of its neighbors. World Bank attributed the growth of the Asia Pacific region to the recovery in domestic consumption and high commodity prices. However, it noted that China's strict implementation of its zero-Covid policy has disrupted the country's export and industry sectors. While the country's property and housing sectors have been struggling due to the lack of confidence in the market. In August, new home sales in 70 Chinese cities fell by 1.3%, which was worse than expected. Also, over a third of the country's property loans are now considered to be bad debts. The Chinese government is about to hold its most important political event of the year, which is the Party Congress. During this time, the country's political elite will undergo a major reshuffling. It's expected that President Xi Jinping will be reappointed for a third term. Despite the political sensitivity of the situation, there has been no change in the Covid policy. The government's hardline policy has also affected the country's national and local markets. It has resulted in hundreds of millions of people being placed under lockdown at any given time. Even the Organization for Economic Cooperation and Development (OECD) noted that China's growth is expected to slow down to 3.2% in 2022. However, it noted that the country's policy support could help boost its growth in the next few years. Last week, the Asian Development Bank also lowered its outlook for China's growth. It now projects that the country's economy will grow at a slower rate of 4.5% in 2023. As the global economy slows down, countries should also address the issues that are hindering their development. These include domestic policies that are affecting their economic growth.
Pic Courtsey-Chris Slupski at unsplash.com
(The views expressed are those of the author and do not represent views of CESCUBE.)
