China’s economy is deteriorating and may remain so for some time

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China is plagued with serious economic problems. Growth has stagnated, youth unemployment is at a record high, the housing market is collapsing, and businesses are suffering from repeated supply chain problems.

China, the world’s second largest economy, is grappling with the effects of severe drought and its vast real estate sector is suffering the consequences of being heavily indebted. But Beijing’s adherence to a strict zero-coronavirus policy has exacerbated the situation, and there are no signs of that changing this year.

in the past two weeks, Eight megacities have gone into full or partial lockdown. Together, 127 million people live in these important centers of manufacturing and transportation.

At least 74 cities across the country have closed since late 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 his 35% of China’s gross domestic product (GDP).

Recent restrictions Despite the damage, it demonstrates China’s uncompromising commitment to eradicating the virus with the strictest control measures.

Craig Singleton, Senior Fellow in China, said: “Beijing appears willing to absorb the economic and social costs resulting from its zero-corona policy because of the alternative epidemic and associated Hospitalizations and deaths represent an even greater threat to the government’s legitimacy.” at the Foundation for Defense of Democracy, a DC-based think tank.

For Chinese leader Xi Jinping, preserving its legitimacy is a big deal as the Communist Party seeks to be elected to an unprecedented third term next month when it holds its most important party convention in a decade. is more important than ever.

“There may be a softening of certain policies in early 2023 after Xi Jinping’s political future is assured, but a major policy shift before the Congress is unlikely,” Singleton said.

“Still, the Communist Party lacks both the time and available policy tools to address many of the most pressing systemic threats to China’s economy,” he added.

Raymond Yang, chief economist for Greater China at ANZ Research, said the economy will continue to deteriorate in the coming months. As the party convention draws nearer, local governments are “increasingly more inclined to prioritize zero coronavirus and wipe out virus outbreaks,” he added.

Tighter restrictions due to COVID-19 will hit consumption and investment during the traditional Chinese peak season, known as China’s “Golden September, Silver October”. home sale.

Meanwhile, a sharp slowdown in the global economy doesn’t bode well for China’s growth either, Yeung said. Weakening demand from the US and European markets will weigh on Chinese exports.

He now expects China’s GDP to grow by just 3% this year, well below Beijing’s official target of 5.5%. Other analysts are even more bearish. Nomura lowered his forecast to 2.7% this week.

More than two years after the pandemic, Beijing is still sticking to its drastic approach to the virus, including mandatory quarantines, mass mandatory testing and snap lockdowns.

The policy was considered successful during the early stages of the pandemic. China has kept the virus at bay in her 2020 and her 2021, stemming the high number of deaths suffered by many other countries and building a swift recovery following a record contraction in GDP. At a ceremony in 2020, President Xi said China’s success in containing the virus was due to the Communist Party’s Superiority About Western democracy.

But with the highly contagious Omicron variant weakening the effectiveness of the zero-Covid policy, premature declarations of victory are back to haunt him.

But giving up coronavirus-zero doesn’t seem like an option for Xi Jinping, who has focused more on defeating the virus than saving the economy this year.

During a visit to Wuhan in June, he said China must maintain its zero-coronavirus policy “even though it may damage the economy.” At a leadership meeting in July, he reaffirmed that approach and urged officials to look at the relationship between virus prevention and economic growth “from a political perspective.”

“Beijing has sought to assert its zero-Covid policy as a testament to the party’s strength and, by extension, Xi Jinping’s leadership,” Singleton said.

Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, said the change in approach may not take place until next year, and even then it will most likely be very gradual.

“It’s going to be a long process,” he said, adding that Hong Kong Where visitor quarantine and inspection rules have recently been relaxed It could be “a key leading indicator of what happens on the mainland.”

Beijing appears unshakable on its zero-coronavirus strategy, The government has rolled out a series of stimulus packages to boost the sluggish economy, including a 1 trillion yuan ($146 billion) package announced last month to improve infrastructure and ease power shortages.

The government is trying to achieve the “best possible outcome” for economic growth and jobs, but “balancing the two goals is very difficult,” said ANZ’s Yeung.

Recent data suggests China’s economy could head for another dismal performance in the third quarter. Q2 GDP grew only 0.4% year-on-year, Sharp slowdown from Q1 growth of 4.8%.

China’s manufacturing contracted for the first time in three months in August, while service sector growth slowed, according to a public-private survey released last week.

“The situation is not pretty as China continues to battle the most widespread wave of Covid infections to date,” Nomura analysts said in a research report on Tuesday.

China’s job market has deteriorated over the past few months. The latest data show that the unemployment rate among 16-24 year olds hit a record high of 19.9% ​​in July, breaking records for the fourth straight month.

In other words, there are currently about 21 million unemployed young people living in cities and towns in China. Local unemployment rates are not included in official figures.

“The biggest concern is employment,” said ANZ’s Yeung, adding that youth unemployment could reach 20% or more.

Other economists say more jobs are likely to be lost this year as social distancing measures hit the catering and retail industries and put pressure on manufacturers.

The worsening real estate market downturn is another big drag. The sector, which accounts for his 30% of China’s GDP, has been crippled since 2020 by the government’s campaign to curb reckless borrowing and curb speculative trading. Real estate prices are falling, and so are sales of new homes.

The zero Covid rule could be eased in 2023, but post-congress housing policies may not change much.

“Over the next two years, the economy is unlikely to repeat its previous high growth of 5.5% or 6%,” Yeung said.

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