Domestic Bonds

China’s zero-Covid policy is killing its already slowing economy

A health worker waits to take swab samples during a coronavirus Covid-19 lockdown in Shanghai’s Jing’an district on May 27, 2022. HECTOR RETAMAL/AFP via Getty Images

China’s harsh zero Covid policy is weighing heavily on its economy, to the point of threatening China’s long-term prosperity. Economic data for April suggests that the world’s second largest economy could see Nope growth this quarter and the weakest annual growth in more than four decades. If China‘s growth has come to a halt, it could have serious consequences not only for China but also for the developed world whose economies are deeply intertwined with China’s.

On May 25, Chinese Premier Li Keqiang, the second most powerful leader after President Xi Jinping, held a rare emergency meeting with about 100,000 Chinese Communist Party officials from local governments, banks and state-owned enterprises. , calling on them to make an effort to stabilize the faltering economy. At the meeting, Li set a goal of keeping China’s gross domestic product (GDP) growth above zero in the current quarter ending June 30, which is clearly not much. ambitious compared to China’s official target of 5.5% annual growth set at the beginning of the year.

Since the omicron variant hit mainland China in early March and the Chinese government responded with strict lockdown measures that effectively halted normal economic activities, investment banks and economic research groups have repeatedly cut their forecasts of China’s GDP. Goldman Sachs cut its projection from around 5% to 4%. JPMorgan and UBS peg 2022 growth at around 3%. Bloomberg Economics, the most bearish of all the data providers, predicts China’s GDP will grow just 2% this year, nearly a full percentage point below its projection for the United States.

Even if China’s GDP growth slows to 2%, we probably won’t see it in the official data. Xi promised that China will grow faster than the United States this year, said Mary Lovely, professor of economics at Syracuse University and China expert at the Peterson Institute for International Economics. “We will not see an official growth figure below 3%. However, the slowdown is hitting Chinese households, even those not directly struggling with the Covid lockdowns. Chinese citizens will certainly realize that growth has slowed down,” she said.

Covid lockdown accelerates economic downturn

China’s economy started showing signs of slowing down even before the Covid-19 outbreak. And the pandemic is making things worse.

The most alarming data point in China’s economic reading in April is a record unemployment rate among young workers. It is estimated that almost one in five people aged 16 to 24 were unemployed in April. The unemployment rate for people aged 25 to 59 reached 5.3%, the highest level since June 2020.

Real estate, which accounts for a quarter of China’s $18 trillion economy and a major engine of growth over the past two decades, is facing a crisis brought on by rising corporate debt and weak housing demand.

The meltdown started with Evergrande Group, one of China’s biggest property developers, which defaulted on $20 billion in US dollar bonds in December 2021. Its smaller peers have a similar problem. So far this year, 22 Chinese issuers of high-yield real estate bonds have either defaulted on their US dollar bonds or deferred interest payments, according to Goldman Sachs. The bank expects nearly a third of China’s high-yield property bonds to default this year. He previously predicted 19 percent.

Another centerpiece of the Chinese economy, the technology sector, is also struggling. Internet giants Alibaba, Tencent and JD.com all posted their slowest ever revenue growth for the last quarter and announced massive layoffs.

When will China’s economy recover?

As the lockdown drags on, analysts are increasingly less optimistic about China’s return to normal. Xi reaffirmed his zero Covid policy despite criticism from the World Health Organization and pragmatic minds in his party (like Premier Li) pushing for a speedy reopening.

Earlier this week, Beijing has rolled out a stimulus package that includes tax refunds, deferred payments on social programs, low-interest loans and other items meant to boost business activities. However, with tens of millions of people still confined to their homes, it is unclear how well the stimulus will work.

“Monetary authorities are struggling to increase credit growth even as banks have funds to lend – who wants to borrow when demand isn’t growing?” Belle said.

For China, the price of zero Covid is zero economic growth