The Chinese economy is facing some of the most severe problems in more than three decades as the government continues to struggle to end the outbreak of the Omicron variant of COVID-19 through major city lockdowns and other public health measures.
Workers work near a construction site with cranes near the central business district skyline in Beijing, China, Oct. 11, 2021. (` Photo/Ng Han Guan)
Last week, Premier Li warned that China will struggle to achieve positive economic growth in the second quarter of this year after posting 4.8 percent growth in the first quarter.
The situation is “slightly worse” than at the beginning of the pandemic in early 2020, when the Chinese economy shrank by 6.9 percent. Economic indicators have fallen significantly, and “difficulties in some aspects and to some extent are greater than when the 2020 epidemic hit us hard.”
“We will try to ensure that the economy grows in the second quarter. This is not an ambitious goal and far from our 5.5 percent target. But we have to do it,” he said.
The official unemployment rate in China, which only covers city dwellers, had risen to 6.1 percent. Li pointed out that unemployment among 16-24 year olds has risen to an all-time high of 18.2 percent, with the unemployment rate among migrant workers also rising sharply.
Li’s focus on growth and the unemployment rate is significant, as the government sees strong growth as essential to maintaining what it calls “social stability.”
In a report on the address, based on transcripts, the Financial Times said Li noted that “corporate liquidations rose more than 23 percent year-on-year in April as the whole of Shanghai entered a full lockdown that ended the year.” Commercial operations across eastern China affected . Mostly private small and medium-sized enterprises [SMEs]that account for more than half or more of government revenue, economic output and employment are hardest hit.”
The Prime Minister stressed the importance of COVID prevention while maintaining production. “We need to ensure that both smooth functioning of supply chains and COVID prevention are achieved,” he said, adding that “many SMEs and local authorities told me their worst days have come.”
Progress is not satisfactory, with some provinces saying only 30 percent of their businesses have reopened. “The quota must be raised to 80 percent in the short term.”
Li reported that power generation, freight transportation and new bank lending all fell in the first half of this month.
Data on the economy underscores the growing problems facing government agencies. Earlier this month it was reported that industrial production, a key driver of China’s economy, fell 2.9 percent in April, retail sales fell 11 percent and auto sales nearly halved.
Since these figures were published, it has become known that industrial groups recorded the sharpest drop in profits since the beginning of the pandemic at the beginning of 2020, down 8.5 percent compared to the previous year.
A senior National Bureau of Statistics official, Zhu Hong, said that the Omicron outbreak in April “had a major impact on the production and operations of industrial companies, and manufacturing company profits fell by 22 percent.
Authorities have eased financial conditions with the central bank slashing its five-year interest rate, which is used for mortgage lending, from 4.6 percent to 4.45 percent. But such measures will do little to ease the crisis in the property sector, where the giant Evergrande has already defaulted. The problems in the real estate sector will not be solved when all knock-on effects are taken into account, as home sales continue to decline. The sector accounts for between 25 and 30 percent of China’s economy.
Earlier this month, China’s third-largest developer, Sunac, reported that it missed a payment on a $742 million offshore bond.
After the 2008 financial crisis, the government and fiscal authorities were able to stimulate the economy with a massive stimulus package that included higher spending and more credit. The stimulus corresponded to around 13 percent of GDP.
This path is now closed due to changing global financial conditions. All major central banks, led by the US Federal Reserve, are now raising interest rates in response to the surge in inflation. Fearing that this will lead to an increase in workers’ struggles in support of wage demands, they are attempting to curb economic growth through higher interest rates to stem this growing movement.
Global financial conditions are having a major impact on China. The value of the yuan is falling – falling 4.5 percent in April – leading to capital outflow.
As economics writer Stephen Bartholomeusz of the Sydney Morning Herald noted in an op-ed published last week: “The Chinese authorities are keenly aware that they are cutting their own [interest] Interest rates that are too aggressive to try to spur activity could turn what is already a steady outflow of capital into a full-fledged and destabilizing flight of capital.”
The central government also appears to be fighting back calls from local government agencies for increased support.
In comments on last week’s conference call, Li said several provinces have asked the central government for support but said resources are limited. “I’m here to share my bottom line with you. There is a reserve fund managed by the Prime Minister. Apart from that, the municipalities have to raise funds [on your own.]”
China, too, is facing a food crisis in at least part of the country. According to Li, Jilin said a major agricultural region in the northeast was badly hit and grain production was “barely” able to meet demand, warning that a poor summer harvest would create “big problems”.
Even before the launch of Omicron, China had major economic problems – especially in the highly indebted real estate sector.
However, they have been greatly amplified by the refusal of governments worldwide to develop an international strategy to eliminate COVID-19. Consequently, China faces the task of fighting the virus nationally under conditions where it is constantly open to reintroducing infections from the rest of the world.
The growing demand from governments, corporations and finance capital is that China abandon its zero-COVID program and adopt the “let it rip” policy that has resulted in millions of needless deaths around the rest of the world. If accepted, it would result in hundreds of thousands, possibly millions, of deaths.
This, in turn, would plunge the Xi Jinping regime into a crisis because the zero-COVID policy, despite some bureaucratic excesses in its implementation, enjoys broad popular support.
The major powers’ stance on China on COVID is another expression of the policy they have had essentially from the start – that nothing must be done that would impede the flow of profits, and therefore they are demanding that China “open up”.
But their refusal to take virus-elimination measures to prop up financial markets is now rebounding on the global economy, leading to the biggest spike in inflation in more than four decades and a significant slowdown, if not a complete decline, in the second of the world’s economies World -largest economy, which will exacerbate international recessionary tendencies.
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