The world’s second largest economy is struggling with the effects of a severe drought and its huge real estate sector is suffering from the effects of excessive debt. But the situation is made much worse by Beijing’s adherence to a strict zero-Covid policy, and there are no signs this year will change.
Within the past two weeks, Eight megacities went into full or partial lockdown. Together, these vital centers of production and transportation are home to 127 million people.
Nationwide, at least 74 cities had been in lockdown since the end of August, affecting more than 313 million residents, according to CNN calculations based on government statistics. Goldman Sachs estimated last week that lockdown-affected cities account for 35% of China’s gross domestic product (GDP).
The latest restrictions demonstrate China’s uncompromising stance to eradicate the virus with the strictest control measures despite the damage.
“Beijing appears willing to bear the economic and social costs of its zero-Covid policy because the alternative — widespread infections along with associated hospitalizations and deaths — poses an even greater threat to government legitimacy said Craig Singleton, Senior China Fellow at the Foundation for Defense of Democracies, a DC-based think tank.
Maintaining that legitimacy is more important than ever for Chinese leader Xi Jinping as he seeks to be selected for an unprecedented third term when the Communist Party meets next month for its most important congress in a decade.
“Major policy changes ahead of the congress appear unlikely, although we may see some policy softening in early 2023 after Xi Jinping’s political future is secured,” Singleton said.
“Even then, the party is running out of both time and available political levers to address many of the most pressing systemic threats to China’s economy,” he added.
The economy will continue to deteriorate in the coming months, said Raymond Yeung, chief economist for Greater China at ANZ Research. Local governments will be “more inclined to prioritize zero-Covid and quell the virus outbreaks” as the party convention approaches, he added.
The tightening of Covid restrictions will hurt consumption and investment during China’s “Golden September, Silver October”, traditionally the peak season for China home sales.
Meanwhile, even a sharp slowdown in the global economy does not bode well for China’s growth, Yeung said, as weaker demand from the U.S. and European markets will weigh on China’s exports.
He now expects China’s GDP to grow just 3% this year, falling well short of Beijing’s official target of 5.5%. Other analysts are even more pessimistic. Nomura lowered its forecast to 2.7% this week.
No exit until early 2023?
More than two years into the pandemic, Beijing is sticking to its extreme approach to the virus with enforced quarantines, mandatory mass testing and quick lockdowns.
The policy was seen as successful in the early stages of the pandemic. China managed to contain the virus in 2020 and 2021 and stave off the large number of deaths suffered by many other countries while embarking on a rapid recovery after a record drop in GDP. At a ceremony in 2020, Xi proclaimed that China’s success in containing the virus was a testament to the Communist Party’s success “superiority“ about western democracy.
But the premature declaration of victory has come back to him, as the highly transmittable Omicron variant makes the zero-Covid policy less effective.
However, abandoning zero-Covid does not appear to be an option for Xi, who this year has repeatedly placed more emphasis on defeating the virus than saving the economy.
During a trip to Wuhan in June, he said China must maintain its zero-Covid policy “even if it could hurt the economy”. At a leadership meeting in July, he reiterated that approach, urging officials to look at the relationship between virus prevention and economic growth “from a policy perspective.”
“Beijing has attempted to present its zero-Covid policy as a testament to the strength of the party and, by extension, Xi Jinping’s leadership,” Singleton said.
A change in approach may not come until next year, and even then it will most likely be very gradual, said Zhiwei Zhang, president and chief economist of Pinpoint Asset Management.
“It’s going to be a long process,” he said, adding that Hong Kong — where visitor quarantine and testing rules have recently been relaxed — could be “an important early indicator of what’s about to happen on the mainland”.
Another gloomy quarter
While Beijing appears to be unshakable on its zero-Covid strategy, the The government has rolled out a series of stimulus measures to boost the ailing economy, including a 1 trillion yuan ($146 billion) package unveiled last month to improve infrastructure and alleviate electricity shortages.
The government is trying to achieve “the best possible outcome” for economic growth and jobs while sticking to zero-Covid, but it is “very difficult to reconcile the two goals,” ANZ’s Yeung said.
Recent data suggests that the Chinese economy could be heading for another gloomy month in the third quarter. Q2 GDP grew just 0.4% year-on-year, slowed sharply from 4.8% growth in the first quarter.
Official and private surveys released last week showed that China’s manufacturing sector contracted in August for the first time in three months, while service sector growth slowed.
“The picture is not pretty as China continues to battle the broadest wave of Covid infections yet,” analysts at Nomura said in a research report on Tuesday.
labor and property issues
China’s labor market has deteriorated in recent months. The latest data showed that the unemployment rate among 16-24 year olds hit an all-time high of 19.9% in July, the fourth straight month of record-breaking.
This means that China now has about 21 million unemployed youth in cities and towns. Rural unemployment is not included in the official figures.
“The most worrying issue is jobs,” said ANZ’s Yeung, adding that youth unemployment could rise to 20% or more.
Other economists say more job losses are likely this year as social distancing measures hurt restaurants and retail, which in turn puts pressure on manufacturers.
The deepening downturn in the real estate market is another major drag. The sector, which accounts for up to 30% of China’s GDP, has been paralyzed since 2020 by a government campaign to curb reckless borrowing and curb speculative trading. Property prices have fallen, as have new home sales.
While there could be some relaxation of zero-Covid rules in 2023, post-party housing policy may not look much different.
“The economy is unlikely to repeat previously high growth of 5.5% or 6% in the next two years,” Yeung said.
CNN’s Beijing bureau contributed to this report.
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