China’s economy narrowly escaped a contraction in the second quarter as the fallout from President Xi Jinping’s zero-Covid policy stoked expectations that Beijing would inject hundreds of billions of dollars of stimulus to shore up growth.
The world’s second-biggest economy expanded 0.4 per cent year on year in the three months to the end of June, below the 1.2 per cent forecast by economists, and down from the 4.8 per cent recorded in the first quarter.
The slowdown reflected the hit from a two-month lockdown in Shanghai, which took full effect in April, and illustrated the threat to global growth from Xi’s attempt to eradicate Covid-19 in the world’s main manufacturing hub.
The National Bureau of Statistics figures were released at a tense juncture for Xi’s economic planners. Beijing’s battle to eradicate coronavirus outbreaks has relied on months of snap lockdowns and heavy-handed restrictions on mobility, dragging on the pace of China’s economic recovery.
The weak second-quarter growth will make it hard for the economy to achieve Beijing’s target of 5.5 per cent annual growth for 2022, itself a three-decade low.
Adding further pressure on Xi’s administration, youth unemployment rose to a record of 19.3 per cent.
Thirty-one Chinese cities are under full or partial lockdowns, affecting 247.5mn people in regions accounting for about 17.5 per cent of the country’s economic activity, according to an analysis released this week by Japanese investment bank Nomura.
Xi’s administration has consistently said it would prioritise protecting the country from mass coronavirus outbreaks over the economy. It has blamed the country’s slowdown on the pandemic and the risk of stagflation in the global economy.
“Generally speaking, with a series of policies to solidly stabilise the economy achieving notable results, the national economy has overcome the adverse impact of unexpected factors, demonstrating the momentum of a stable recovery,” said Fu Linghui, a spokesperson for the NBS, at a briefing in Beijing on Friday.
On a quarter-on-quarter basis, China’s gross domestic product fell 2.6 per cent, compared with a revised 1.4 per cent growth in the first three months of the year and below expectations of a 1.5 per cent contraction, according to a Reuters poll.
Retail sales, a critical gauge of sentiment in the world’s biggest consumer market, were down 4.6 per cent in the second quarter after a double-digit fall in April. Consumer spending has lagged behind the wider recovery since the start of the pandemic, in part because of travel restrictions.
Industrial production was up 3.9 per cent in June compared with the same period a year earlier. Factory output was up 0.7 per cent for the second quarter.
Fixed asset investment, China’s main measure of capital spending, grew 5.6 per cent last month. Infrastructure investment was 7.1 per cent higher as Beijing increased its stimulus efforts, while real estate investment dropped 5.4 per cent.
China’s deeper economic slowdown may prompt looser monetary policy and fiscal stimulus, said analysts, in contrast to developed economies that are raising interest rates to tackle high inflation.
But a new phase of credit-fuelled investment risks undercutting attempts to deal with high leverage and bad debts in the property sector, which have raised worries over financial stability. The People’s Bank of China has been reluctant to cut interest rates for fear of capital outflows.
Despite criticism that the central government is reverting to debt-fuelled and wasteful spending — much of it targeted at large-scale infrastructure, and funded through local governments — Beijing is increasingly desperate to stem the economic slowdown and rising unemployment.
The Financial Times reported this week that local governments across China would be allowed to issue an additional Rmb1.5tn ($223bn) worth of bonds this year to boost flagging growth. The spending would be brought forward from next year’s quota.
Additional reporting by Tom Mitchell in Singapore and Jennifer Creery and Andy Lin in Hong Kong
