Two decades ago, China’s factory-driven economy awed the world as it expanded at more than 10% per year. But the country has missed double-digit growth over the past decade. The GDP shrank from April to June this year compared with the previous three months, though it topped the same quarter of 2021, but just barely.
Economists tell a consistent story about how the drop happened: Lockdowns to stop COVID-19 infections hurt factory work and export shipments. They say those setbacks added to financial hardships among China’s top property firms and the shocks of a 2021 crackdown on major Chinese tech icons.
China’s $18 trillion economy, the world’s second largest after the United States, shrunk 2.6% from April to June compared to the first three months of the year.
“China’s economy has seen signs of disruption since February due to the impact of COVID-19 outbreaks in a number of Chinese cities,” said Rajiv Biswas, executive director and Asia-Pacific chief economist at S&P Global Market Intelligence. He called industrial production, retail sales and port operations particular trouble spots.
“The resulting disruption to retail sales and industrial production has been quite severe during April and May. And in Shanghai, port operations and logistics were also quite heavily disrupted during April,” Biswas said.
Shanghai is China's chief port city. The central government ordered lockdowns there in April.
China’s economy grew close to 10% per year from 2003 to 2010, World Bank data show. Annual growth gradually slowed through 2019 before dipping to 2.2% in the first pandemic year, 2020, and rebounding to 8.1% last year.
Pressure on jobs, spending
The lockdown-weary country recorded more than 6% unemployment in April, compared with nearly 5% (4.8%) at the end of 2021. Younger workers and smaller firms have been hit especially hard, analysts say.
Individuals contacted by VOA in Beijing, Shanghai and the inland city of Changsha this week said they knew about the employment crunch but felt their own jobs were stable.
“At least I don’t know of any friends around me who are jobless, and I’ve not heard that many complaints,” said a fashion importer who spoke on condition of anonymity.
Chinese consumers are now spending less than normal because they cannot go outside during mandatory closures, or they fear cuts in income from eventual job losses, said Alicia Garcia-Herrero, chief Asia-Pacific economist at French investment bank Natixis, who is based in Hong Kong.
Retail sales grew at a low of 3% in June, even as lockdowns eased, Garcia said, pointing to “very negative sentiment as well as very slow growth in disposable income.”
“It is very clear that the household sentiment remains very negative, perhaps because of the uncertainty of future lockdowns as mass testing remains pervasive,” she said.
Setbacks in property, tech, global confidence
Last year, the economy was already faltering due to problems in real estate and tech.
A number of big name Chinese property developers began to default on billions of dollars’ worth of loans last year, according to consultant firm Dezan Shira & Associates, who said homeowners who bought units through a “pre-pay model” are now refusing to pay mortgages on unfinished homes.
In tech, Chinese regulators began in cracking down on the country’s most powerful firms in late 2020, including e-commerce giant Alibaba Group and social media juggernaut Tencent. Regulators have cited concerns about monopolistic activity and data security.
China’s economic malaise is worrying world markets because the “slope” of recovery is less steep than it was when COVID-19 hit in 2020, said Zerlina Zeng, a senior analyst at the CreditSights research firm in Singapore. Missed mortgage payments threaten the value assets, including property, she added.
Disruptions to export shipping and manufacturing in China have hobbled supply chains in much of the world, in turn adding to inflation and fears of recession.
Is the worst over?
Officials in Beijing are nudging the economy forward again by spending on infrastructure. The GDP is already showing signs of recovery, Zeng said. Demand for cement and cars, including electric ones, is already up, she said. Officials are also relaxing last year’s tough stance on the tech industry, Zeng added.
“Overall, we are seeing a better macro picture” this quarter, she said. “We think that for sure, [the economy] is going to recover but that the slope of the recovery is not going to be as good as what the market had expected back in the first quarter of this year.”
Any future lockdowns will probably target neighborhoods rather than all of Shenzhen or Shanghai as the government did earlier this year, Zeng said. But she cautioned that China’s goal of 5.5% economic growth this year is “very ambitious.”
The government-run China Daily posted an investment bank editorial last week calling for 5.3% economic growth year on year from July through September, and 5.9% in the final months of 2022.