Chinese Economy Enters the Danger Zone

Chinese Economy Enters the Danger Zone
The closed entrance of a residential area during lockdown in Shanghai on May 5, 2022. (Aly Song/Reuters)
Fan Yu

China’s economic situation looks increasingly precarious.

Last year, the Chinese Communist Party (CCP) began a regulatory reset that has throttled the country’s economic outlook. Today, amid escalating COVID-related lockdowns, depressed consumer and business sentiment, and geopolitical instability, the risk of an economic contraction is clear.

Global businesses need to evaluate their China strategy and brace for economic pain ahead, especially companies that are dependent on the world’s No. 2 market, such as industrial and materials firms and luxury retailers.

China’s economy has slowed considerably in 2022, as local authorities have enacted lockdown measures affecting dozens of cities, including the country’s top economic hubs of Shanghai and Shenzhen, hampering factory activity and economic production. While some economists were hoping authorities would relax these measures, the CCP regime has done just the opposite.

Top Beijing officials committed to China’s “zero-COVID” policy in the strongest terms at a Politburo meeting in early May. The Standing Committee, chaired by regime boss Xi Jinping, stated that the country would “exhaust all means and efforts” to stop COVID-19. And perhaps most alarmingly to economists, the CCP left out any vow to support or minimize damage to the nation’s economy.

China’s 5.5 percent official projected gross domestic product growth in 2022? All bets are now off.

Leading indicators are beginning to show the extent of the upcoming damage. In April, China’s services sector contracted at its quickest pace since February 2020, the early days of the pandemic.

The independent Caixin China General Services Business Activity Index declined to a reading of 36 in April from 42 in March, its fourth consecutive monthly drop. A figure of more than 50 means the service sector is expanding, so a reading of 36 means that the country’s service sector is deep in contraction.

Another economic reading of the manufacturing sector, the Caixin China Manufacturing Purchasing Managers’ Index, also declined to 46 in April from 48 in March. This reading declined at its quickest pace since February 2020 and shows that factory orders are slowing down, with ongoing lockdowns being a key culprit.

The bleak economic outlook has prompted the CCP to publicly state that policy help will be on the way.

One such policy is tax cuts, including value-added tax (VAT) credits, which the state council recently promised to companies. Another potential policy easing is to help the technology sector. After months of rhetoric around regulating China’s “platform economy,” recent messaging from state-controlled media has moderated somewhat, including announcing official efforts to boost infrastructure development and expand logistics support to encourage “healthy development” of this sector.

Perhaps Beijing came to the realization that “gig platforms” can help ease the quality of life for consumers during the country’s draconian lockdowns.

A recent front-page editorial in the Economic Daily, a CCP-controlled newspaper, confirmed the policy shift away from hardline regulatory measures against technology firms. The editorial declared that excessive regulatory measures, which began in early 2020, would end, followed by “rules and market-based” supervision of the sector.

There’s more. Chinese Premier Li Keqiang also recently announced support for the all-important export sector, including having the central government help with securing foreign orders of goods, keeping a stable yuan currency, and expanding government-assisted warehouse and inventory financing.

But the real estate sector is unlikely to see any respite in the near future. Despite lifting home purchase restrictions across many Chinese cities, April home sales were less than half of those in the same month last year.

Business website Yicai Global reported that sales at China’s top 100 developers fell by 59 percent in April from the same month in 2021 and 16 percent from the previous month. No doubt the slowing economy and ongoing COVID-19 restrictions have hurt consumer appetite to borrow and spend.

Global companies with extensive China operations are likely already feeling the crunch. But one sector—luxury goods—could see continued contraction in China, despite recent measures to stimulate the economy.

That’s because the ongoing clampdown on billionaire and CCP Party member malfeasance is unlikely to wane. Experts believe this could bring further depressed demand for luxury goods, similar to the one experienced during the last wave of the anti-corruption campaign in 2012.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
Fan Yu is an expert in finance and economics and has contributed analyses on China's economy since 2015.
Related Topics