News Analysis
Originally expected to recover from its COVID economy, China is now struggling with new restrictions.
China was one of the first countries to bring the COVID-19 outbreak under control and resume economic activity. This put it in the unique position of economic growth, while the rest of the world saw their economies grind to a halt. In June, industrial, consumption, and investment activity all looked promising, but in July, these numbers began to wane.
The recent Delta variant outbreaks have caused China to reimpose lockdown measures in numerous cities, slowing China’s factory output and retail sales growth. In July, retail sales grew by 8.5 percent, compared to 12.1 percent in July 2020. Unemployment also ticked up to 5.1 percent in July from 5 percent in June. Unemployment among young people reached levels not seen in decades. Auto manufacturing declined, while the real-estate sector also slowed. As the demand for labor in these sectors decreases, experts expect unemployment to further increase among low-skilled workers.
In response to China’s economic slowdown, Goldman Sachs, Morgan Stanley, and other institutions have cut their China growth projections. Originally, China’s annual gross domestic product (GDP) growth was expected to reach 8.6 percent to 8.9 percent, but that figure has now been downgraded to 8.2 percent to 8.3 percent. Similarly, ING Bank has decreased its third-quarter China growth projection to 4.5 percent from 5.5 percent.
At least 17 provinces have experienced outbreaks of the Delta variant, with 143 daily new infections, more than double the previous week. An annual international film festival was canceled, as were exhibitions and other public events. Beijing has also blocked planes and trains from coronavirus hotspots. The internal tourism sector was hit, even in places that were willing to accept guests from other parts of the country, because the managers of many state-owned firms instructed their employees not to travel. Consequently, travel firms have been forced to issue refunds.
These domestic travel restrictions are particularly damaging, as they come during the month of August, when people would normally be traveling and spending money. The industries hit hardest by new restrictions are retail, restaurant, tourism, and transportation, all sectors that are still reeling from previous pandemic lockdowns.
The Chinese regime has closed down a large part of at least one key port. Meidong Terminal, which is responsible for processing 25 percent of the cargo at the Ningbo–Zhoushan port—the world’s third-busiest port—has been closed. COVID restrictions around the world have increased shipping rates by as much as 63 percent. Meanwhile, Chinese shipping to Africa is being hampered by a shortage of containers. Manufacturers have complained that disruptions in shipping have hampered their ability to prospect new clients or even serve existing ones. Travel restrictions, in China and abroad, have also made it difficult for non-manufacturing firms that are dependent on face-to-face meetings with stakeholders and clients in other countries.
While problems with shipping and travel have negatively affected China’s famed export sector, there has also been a decline in overseas orders. Countries around the world are still struggling with their own economic recovery, leaving their citizens in less of a position to purchase Chinese products. Consequently, export orders have reached their lowest level since June 2020.
The effects of the lockdowns could be mitigated if China would decide to just “live with the virus,” as some U.S. states have done. The Chinese regime, however, has a zero-tolerance policy on COVID, which suggests that these measures will be in place until the virus is fully eradicated. This puts China’s economic recovery in doubt, or at the very least, makes it nearly impossible to predict when China will recover.
Apart from lockdown restrictions associated with the Delta variant, China is suffering from a number of other issues. Raw material costs have increased. Supply shortages and a global chip shortage have hurt manufacturing, particularly in the automotive industry. Pollution controls are inhibiting economic activity, reducing the output of steel and cement. Unequal economic recovery around the world is also making it more difficult for China to sell products in some markets or to manufacture them in others.
Additionally, China is being hit by adverse weather events. Flooding in Henan Province resulted in 73 deaths and caused insurance losses of $1.7 billion. The Henan floods also closed down factories, further disrupting supply chains, a ripple that was felt around the world. Meanwhile, typhoon In-Fa wrought 3.35 billion yuan ($516 million) of damage in Zhejiang Province. Natural disasters, combined with poor economic growth, increased unemployment, and continued lockdowns may cause consumer confidence to falter.
When people are uncertain about the future, they typically borrow less money, spend less, and invest less.
Growing debt risk is another issue. Public debt now stands at nearly four times GDP. Over the past 18 months, corporate bonds have defaulted at an increasing rate. As of July, corporate bond defaults have reached 62.59 billion yuan ($9.68 billion), a level not seen since 2014. Included in this figure is 35.65 billion yuan ($5.51 billion) of bonds from state-owned companies. While bonds that have gone into default still represent a very small percentage of the total, they serve to decrease public confidence, because it had generally been believed that the central authorities would bail out high-profile companies.
At the very least, one would expect the central authorities to bail out state-owned companies, rather than allow them to go into default. Now that this seems no longer to be the case, investors will be more wary about investing in Chinese bonds.
In August, the central bank injected billions of yuan into the financial system through medium-term loans. While interest rates in China have remained steady for 16 months, bank reserve requirements have been reduced by 50 basis points in most cases. Many traders and analysts expect interest rates to be cut as the country’s economic recovery slows. It’s further expected that China will increase infrastructure spending to prevent an economic downturn in the coming months. Beijing has stated that increasing local investment is at the core of its economic priorities for the second half of the year. These measures are expected to drive public debt to even higher, and more worrying, levels.
A slowdown in China could cause a decrease in world commodity prices, which will adversely affect small, developing nations that are dependent on resource exports. Further effects could be felt in global equity, housing, and debt markets. A reduction in consumer demand in China also will decrease the country’s imports, straining economies that are dependent on exporting to China. Another consequence of China failing to recover would be an interruption in global supply chains, which, combined with diminished consumer confidence and decreased consumer spending, will prevent other countries from recovering.
Bad news in world markets could potentially be good news for the U.S. economy, which faces the threat of inflation, resulting from massive stimulus spending. A global slowdown may help to cool the U.S. economy, mitigating inflation.
The fact that China’s economic recovery has slowed suggests that countries with weaker economies will fare even worse. Experts believe that China’s full recovery could take as long as five years, although this number is heavily dependent on when China and the world drop their COVID containment measures.
In spite of all of the challenges, China is still expected to achieve greater than 6 percent GDP growth this year, the highest in decades.
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