China’s economy narrowly avoided contracting in the second quarter as the fallout from President Xi Jinping’s zero-Covid policy fueled expectations that Beijing would inject hundreds of billions of dollars in stimulus to support growth.
The world’s second-largest economy expanded 0.4 percent year-on-year in the three months to the end of June, below economists’ forecasts of 1.2 percent and a 4.8 percent decline recorded in the first quarter.
The slowdown reflects the blow from a two-month lockdown in Shanghai that took effect in April and illustrates the threat to global growth from Xi’s attempt to stamp out Covid-19 in the world’s main manufacturing hub.
The National Bureau of Statistics data was released at a tense time for Xi’s economic planners. Beijing’s battle to stamp out coronavirus outbreaks has relied on months of sudden lockdowns and harsh restrictions on mobility, slowing the pace of China’s economic recovery.
The 0.4 percent result marked China’s second-worst quarterly growth in 30 years after contracting at the start of the pandemic. With growth of 2.5 percent in the first half, Beijing is expected to miss its target of around 5.5 percent annual growth in 2022, itself the lowest level in three decades.
“These data highlight adverse domestic and external circumstances that, in tandem with the government’s zero-Covid strategy, are squeezing economic activity and underscoring the urgent need for short-term policy measures to revive growth,” said Eswar Prasad, professor of economics at Cornell University and former head of the IMF’s China Department.
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He added that while investment growth had held up “better than expected”, it had led to “a series of medium-term fiscal and financial risks”.
Adding further pressure to the Xi administration, youth unemployment has risen to a record 19.3 percent.
Thirty-one Chinese cities are under full or partial lockdown, affecting 247.5 million people in regions that account for about 17.5 percent of the country’s economic activity, according to an analysis released this week by Japanese investment bank Nomura.
The Xi administration has consistently said it will prioritize protecting the country from coronavirus outbreaks over the economy. He blamed the country’s slowdown on the pandemic, the risks of stagflation and the tightening of monetary policy worldwide.
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Fu Linghui, a spokesman for the NBS, acknowledged that meeting Beijing’s growth target of 5.5 percent this year would be “challenging.”
“Generally speaking, with a series of robust economic stabilization policies achieving noticeable results, the national economy has overcome the adverse impact of unexpected factors, demonstrating the momentum of a steady recovery,” Fu told reporters on Friday.
On a quarterly basis, China’s gross domestic product fell 2.6 percent, compared with a revised 1.4 percent rise in the first three months of the year and below expectations for a 1.5 percent contraction, according to a Reuters poll.
Retail sales, a critical gauge of sentiment in the world’s largest consumer market, fell 4.6 percent in the second quarter after a double-digit decline in April. Consumer spending has lagged behind the broader recovery since the start of the pandemic, in part due to travel restrictions.
Industrial production rose 3.9% in June compared to the same period last year. Factory production rose 0.7% in the second quarter.
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Julian Evans-Pritchard, senior China economist at Capital Economics, said the quarterly performance “is even weaker than it appears at first glance”, despite improvements in June.
“The Bureau of Statistics says output in the second quarter was slightly higher than a year ago,” he said. “This is implausible even given the strong recovery shown in June’s monthly data. . . This is not the first time official GDP figures have seemingly underestimated the extent of the economic downturn.
Fixed asset investment, China’s main measure of capital spending, rose 5.6 percent last month. Infrastructure investment rose 7.1 percent as Beijing stepped up its stimulus efforts, while real estate investment fell 5.4 percent.
China’s deeper economic slowdown could trigger a loosening of monetary policy and fiscal stimulus, analysts said, unlike advanced economies that have been raising interest rates to deal with high inflation.
But a new phase of credit-fueled investment risks undermining efforts to address high leverage and bad debt in the property sector, which have raised concerns about financial stability. The People’s Bank of China has been reluctant to cut interest rates for fear of capital flight.
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Despite criticism that the central government is returning to debt-fueled and wasteful spending — much of it aimed at large-scale infrastructure and financed by local governments — Beijing is increasingly desperate to stem the economic slowdown and rising unemployment.
The Financial Times reported this week that local governments in China will be allowed to issue an additional 1.5 trillion yuan ($223 billion) in bonds this year to boost slowing growth. The costs will be carried over from next year’s quota.
However, Prasad said the “room for maneuver” to ease monetary policy by the People’s Bank of China is narrowing due to rising interest rates in the US. He also noted the risks posed by a “spiral of capital flight from currency depreciation that could be triggered by any broad and aggressive monetary policy easing.”
Additional reporting by Tom Mitchell in Singapore and Jennifer Creary and Andy Lin in Hong Kong
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