China faces severe economic slowdown with zero tolerance against covid-19

China faces severe economic slowdown with zero tolerance against covid-19

Measures make the situation look like a recession, a problem that has not plagued the country in decades.
Measures make the situation look like a recession, a problem that has not plagued the country in decades.

Cluttered by Beijing’s zero-tolerance policy against Covid-19, China is facing a period of weaker growth. Jokingly, economists are even using the term “recession” to describe this phase. A recession typically means two straight quarters of contraction, and that remains unlikely in China, according to many analysts. The country has many ways to ensure stronger economic expansion than the US and Europe this year, including the ability to trigger heavy government spending.

But economists say the underlying conditions, exacerbated by lockdowns driven by Covid-19 outbreaks in Shanghai and other cities, are starting to look more like a recession, a problem that has not plagued China for decades.

Millions of recent college graduates are struggling to find work. Companies are less confident. Imports have plummeted and, worried, the Chinese are saving more.

Over the weekend, official PMIs showed contractions in the manufacturing and services sectors for the second straight month in April, reaching the lowest levels since the start of the pandemic in 2020.

By the middle of last month, cement production was at less than 40% of full capacity. Smartphone shipments were down 18% year-on-year in the first quarter. Digger sales in China were 61% lower in April than in the same month last year.

China’s challenges go beyond the latest lockdowns. The impact of the war in Ukraine has driven up costs for Chinese companies and contributed to weakening demand for their exports. Regulatory incursions have hit booming sectors such as technology and education. The real estate industry, a major catalyst for the domestic economy, went into freefall last year as developers piled up debt and home sales took a tumble.

Any sustained slowdown in China will be felt globally, depriving the economy of one of its most reliable engines at a time when inflationary pressures and pressures linked to the Russian-Ukrainian war fuel recession fears in the US and Europe this year. In the first quarter, US GDP shrank at an annualized rate of 1.4%, according to figures released last week.

The expectation was that China would account for a quarter of world economic growth in the five-year period to 2026, according to a projection announced by the IMF (International Monetary Fund) last year.

Commodity exporting countries such as Brazil, which depend on Chinese demand for products such as iron ore and other metals, could face a decline in demand. Already exporters of components and machinery to China, such as Taiwan, South Korea and Japan, saw their sales weaken after lockdowns closed Chinese factories.

Chinese officials have been promising they will make the economy recover, without abandoning their strict Covid-19 control measures.

President Xi Jinping, who is aiming to secure a third term at a key political meeting later this year, has advocated a sweeping campaign to boost growth through more investment in infrastructure. In recent years, Beijing has been reluctant to use this type of strategy for fear of a worsening debt issue in China.

Other plans include the distribution of consumer coupons and actions to contain regulatory campaigns that have jeopardized the expansion of the technology and real estate sectors.

Many economists, however, are disappointed with the Chinese government’s behavior so far. The People’s Bank of China (PBoC) has reduced bank reserve requirements recently but has held rates steady since January, fearful that investors will seek stronger returns elsewhere.

Melissa Galbraith
Melissa Galbraith is the World News reporter for Globe Live Media. She covers all the major events happening around the World. From Europe to Americas, from Asia to Antarctica, Melissa covers it all. Never miss another Major World Event by bookmarking her author page right here.