China’s economy is slowing as it adjusts to a punitive zero-Covid strategy, weakening global demand.
Official growth numbers for the July-September quarter are expected next week – if the world’s second largest economy shrinks, it will increase the chances of a global recession. Beijing’s goal — a 5.5% annual growth rate — is now out of reach, though officials have downplayed the need to meet the target. China narrowly avoided a contraction in the April-June quarter. Some economists do not expect any growth this year.
While the country isn’t struggling with steep inflation like the US and UK, it does have other problems – the world’s factory has suddenly found fewer customers for its products, both domestically and internationally. Trade tensions between China and major economies like the US are also hampering growth.
And the yuan faces its worst year in decades as it plummets against the US dollar. A weak currency spooks investors and fuels uncertainty in the financial markets. It also makes it difficult for the central bank to inject money into the economy.
All of this comes at a time when the stakes are particularly high for President Xi Jinping – he is expected to secure an unprecedented third term at the Communist Party (CCP) congress, which begins on October 16.
So what exactly went wrong?
Covid outbreaks in several cities, including manufacturing hubs such as Shenzhen and Tianjin, have impacted economic activity across industries.
People also don’t spend money on things like food and drink, retail or tourism, which puts pressure on essential services.
On the manufacturing side, factory activity appears to have picked up again in September, according to the National Bureau of Statistics.
The recovery could be due to the government spending more on infrastructure.
But it came after two months of no manufacturing expansion. And it’s raised questions, especially as a private survey showed factory activity actually fell in September, with demand hitting production, new orders and employment.
Demand in countries like the US has also fallen due to higher interest rates, inflation and the war in Ukraine.
- Zero Covid poses danger for China’s Xi
Experts agree Beijing could do more to boost the economy, but there is little reason to do so until Zero Covid ends.
“There’s little point in pumping money into our economy if companies can’t expand or people can’t spend the money,” said Louis Kuijs, Asia chief economist at S&P Global Ratings.
Beijing has stepped in – in August it announced a 1 trillion yuan (US$203bn; £180bn) plan to boost small businesses, infrastructure and real estate.
But officials can do much more to trigger spending to meet growth targets and create jobs.
These include more investment in infrastructure, easier credit terms for homebuyers, developers and local governments, and tax breaks for households.
“The government’s response to the economic weakness has been quite modest compared to previous bouts of economic weakness,” Mr Kuijs said.
Weak real estate activity and negative sentiment in the housing sector have undoubtedly slowed growth.
This has hit the economy hard, as real estate and other industries that contribute to it account for up to a third of China’s gross domestic product (GDP).
“When confidence in the housing market is low, people feel insecure about the general economic situation,” Mr Kuijs said.
Homebuyers have refused to make mortgage payments on unfinished buildings, and some doubt their homes will ever be completed. Demand for new homes is declining, which has reduced the need for imports of building materials.
Despite Beijing’s efforts to prop up the property market, property prices in dozens of cities have fallen more than 20% this year.
With real estate developers under pressure, analysts say authorities may need to do far more to restore confidence in the real estate market.
Extreme weather is beginning to have a profound impact on Chinese industry.
A severe heatwave followed by a drought hit southwestern Sichuan province and the central belt city of Chongqing in August.
As demand for air conditioning grew, it overwhelmed the power grid in a region that relies almost entirely on hydroelectric power.
Factories, including major manufacturers like iPhone maker Foxconn and Tesla, have been forced to cut hours or shut down altogether.
China’s Bureau of Statistics said in August that profits in the iron and steel industry alone fell by more than 80% in the first seven months of 2022 compared to the same period last year.
Beijing eventually came to the rescue with tens of billions of dollars to support energy companies and farmers.
A government crackdown on China’s tech titans — which has already lasted two years — isn’t helping.
Tencent and Alibaba both reported their first revenue declines in the most recent quarter — Tencent’s profits fell 50%, while Alibaba’s net income fell by half.
Tens of thousands of young workers have lost their jobs – contributing to an employment crisis that has left one in five people aged 16 to 24 unemployed. This could harm China’s productivity and growth in the long term.
Investors are also sensing a shift in Beijing — some of China’s most successful private companies have come under closer scrutiny as Mr Xi’s grip on power increases.
As state-owned companies seem to gain popularity, foreign investors are taking money off the table.
Japanese softbank has pulled a huge sum of cash from Alibaba, while Warren Buffett’s Berkshire Hathaway is selling its stake in electric vehicle maker BYD. Tencent has withdrawn more than $7 billion worth of investments in the second half of this year alone.
And the US is cracking down on Chinese companies listed on the American stock exchange.
“Some investment decisions are being postponed and some foreign companies are trying to expand production in other countries,” S&P Global Ratings said in a recent statement.
The world is beginning to adjust to the fact that Beijing may not be as open to business as it used to be – but Mr Xi is risking the economic success that has propelled China in recent decades.
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