Jorge Costa Oliveira
In the face of China’s worst outbreaks of Covid-19, authorities are continuing to pursue a zero-Covid policy, having imposed indefinite lockdowns on approximately 373 million people in at least 45 cities between March and May. These lockdowns, especially the one in Shanghai, lasted longer than expected (Xian has been confined since December 2021) and are causing serious economic disruption and damage in the logistics sector, leading to reduced road freight transport, difficulties in delivering parcels, and the closure of some of China’s ports.
Retail trade is being hit hard, falling -3.5% year-on-year in March, after a +6.7% rise in January-February, as are financial services, and manufacturing.
The government and the central bank (PBoC) have announced measures to bolster economic growth. One of the measures taken so far has been the PBoC’s reduction of the reserve requirement ratio on foreign currency deposits, increasing banks’ credit capacity. And on the 20th of May the PboC lowered its five-year lending prime rate (LPR) by 15 basis points (to 4.45%). The PBoC also said it would ease restrictions on the platform economy that provide online sales of goods and financial technology services. The Chinese government has adopted a set of policies to stimulate consumption (consumer spending accounted for almost 70% of China’s GDP in Q1).
Another measure promised by the Chinese government is the undertaking of infrastructure projects. As in 2021, also in 2022 local governments were allowed to issue special project bonds (SPBs), focused on infrastructure approved by the central government. This additional borrowing triggered in 2021 the first growth in Gross Fixed Capital Formation in a decade. By January 2022, local governments had issued bonds worth 93% more than the same period in 2021.By January 2022, local governments had issued bonds worth 93% more than in the same period in 2021.
But according to Allianz Trade and several analysts, the economic cost of China’s zero-Covid policy is worsening and public compensation policies are not enough to offset the drop in spending and credit in the real estate sector and are apparently insufficient to prevent the slowdown of the economy.
This stems in part from the need to maintain controls and measures to regenerate the real estate sector. However, it also stems from the Chinese leadership’s political stance, for whom economic work in the current year “should prioritize stability, […] safeguard macroeconomic stability, keep key economic indicators within an appropriate range, and ensure social stability in preparation for the upcoming 20th National Congress of the Chinese Communist Party.”
China’s 2022 GDP growth estimates continued to fall as the lockdowns persisted. On May 16th, Citi trimmed its forecast for China’s GDP growth from 5.1% to 4.2%. On May 18th, Goldman Sachs analysts lowered their forecast from 4.5% to 4% following weak data in April.
The gradual slowdown of the Chinese economy caused by the endless lockdowns resulting from the zero-Covid policy, as well as the harmful effects on the global economy and foreign trade, does not seem to be enough to make the Chinese leadership change course. Unless social instability ensues…
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