- Surangana Tiwari and Peter Hoskins
- BBC
The Chinese economy is witnessing a slowdown in the recent period, affected by the country’s adoption of the “zero Covid” strategy and the severe shortage of demand.
It is expected that Chinese growth data will appear in the third quarter of 2022 soon, and if the contraction of the second largest economy in the world turns out, this increases the chances of a global recession.
Beijing’s 5.5% growth target appears to be out of reach despite Chinese officials downplaying the country’s need to achieve this goal while China narrowly avoided deflation in the second quarter of this year. But this year, a number of economists do not expect China to grow at all.
China may not have gone to war with hyperinflation like in the US and UK, but it has other problems – the world’s factory has recently been surprised that there aren’t enough consumers to buy what it produces both domestically and internationally.
Also looming among the problems facing the Chinese economy are trade tensions with other major economies such as the United States, which are also hindering the economy’s progress.
The yuan is also on its way to its worst performance in decades against the US dollar. It is known that the undervalued currency frightens investors, which creates uncertainty in the money markets. The weak currency also makes it difficult for the central bank to inject money into the markets.
And all this comes amid rising shares of Chinese President Xi Jinping, who is expected to get an unprecedented third term in the presidency of the Chinese Communist Party, starting on October 16 this year.
The following is a review of the most important events in China in the recent period and its impact on the second largest economy in the world.
1. Zero Covid wreaking havoc
The spread of Covid-19 was in many Chinese cities, including cities that are production centers for important industries such as Shenzhen and Tianjin, which led to severe damage to economic activity in most sectors.
Spending on food and beverages, retail products and tourism also declined, putting major services under more pressure.
But at the level of the manufacturing sector, factory activity returned to an improvement last September, according to the Office for National Statistics.
This rebound may be the result of more government spending on infrastructure in the country in the recent period. Also, this progress is the first achieved by the sector after two months of stagnation, which raises several questions, especially since the results of a special opinion poll indicated that the activity of Chinese factories declined last September due to the negative impact of the decline in demand on manufacturing output, and orders new, employment.
Demand has fallen in countries like the United States due to high interest rates, high inflation, and the fallout from the war in Ukraine. Experts believe that Beijing can stimulate the economy, but they believe that there is no logical reason to do so until the “zero Covid” strategy is in place.
“There is not enough justification to put money into the economy if companies can’t expand and people can’t spend,” said Louis Kuijs, chief Asian economist at Standard & Poor’s.
2. Beijing is not doing enough
China announced a trillion yuan ($203 billion) plan last August to support small businesses, infrastructure and real estate.
But the country’s officials can do more than that to boost spending with the goal of achieving growth and creating more jobs.
These efforts include more investment in the infrastructure sector, easier lending terms, and tax breaks for Chinese families.
The government’s response to the weak economy has been modest compared to what Beijing has done in previous bouts of weakness in the country’s economy, according to Kuijs.
photo released, Getty Images
Chinese president pushes for “zero COVID” strategy
3. The real estate market is in crisis
There is no doubt that the weakness of the real estate market and the negative sentiment that dominates the housing sector is one of the most important factors that contribute greatly to the slowdown in the Chinese economy.
The downturn in this sector has been one of the hardest blows to the economy since real estate and the closely related sector account for about a third of China’s GDP.
“When confidence in the housing market declines, it leads to uncertainty taking hold of people about the overall economic situation,” Kuijs said.
There is a reluctance to obtain mortgages to purchase unfinished homes or buildings because some suspect that their work will never be completed. The demand for new homes also declined, which led to a decline in imports of building materials.
Despite the efforts made by Beijing to support the real estate market, house prices in dozens of Chinese cities continue to decline by more than 20 percent this year.
Analysts say that as real estate developers continue to come under pressure, the authorities should do more to restore confidence in the real estate market.
4. Climate change makes the situation more difficult
The extreme climate has begun to leave its negative impact on many economic sectors in China. An intense heat wave, followed by a drought, hit southwestern Sichuan Province and Chongqing Province in the central belt last August.
Because of the high demand for air coolers, the pressure began to increase on the electricity grids, which depend entirely on water for power generation.
Many factories in the region, including iPhone maker Foxconn and Tesla, have been forced to reduce working hours or shut down completely.
The National Bureau of Statistics in China confirmed last August that the steel industry sector witnessed a decline in profits by about 80 percent over the first seven months of 2022 compared to the same period last year.
photo released, Getty Images
The real estate market crisis in China increases the threats facing the economy
After that, the Chinese authorities intervened with tens of billions to support energy companies and farmers.
5. Tech giants in China are losing investors
It seems that the crackdown launched by the Chinese authorities against the tech giants in the country, which lasted for two years, has achieved nothing in favor of the Chinese economy.
Giant Chinese technology companies, such as Tencent and Alibaba, announced their losses for the first time in the recent period, as they announced a decline in their profits by about 50 percent, while the net income of Alibaba fell by about half.
Tens of thousands of young people have lost their jobs – adding to the employment crisis that the country is already experiencing, with 1 in 5 people in the 16-24 age group unemployed. It is likely that this could damage productivity and growth in China in the long run.
Investors are feeling a shift in China – some of China’s most successful private companies have come under increased government scrutiny as Jinping tightens his grip on power.
It appears that state-owned enterprises have an advantage in the Chinese market, which is causing investors to withdraw their money from the country.
Japan’s SoftBank, for example, has pulled huge amounts of its investment in Chinese retail giant Alibaba while Berkshire Hathaway, owned by billionaire Warren Buffett, is offering its stake in major Chinese automaker BYD for sale. Tencent has had a divestment of about $7 billion this year alone.
The United States is also cracking down on Chinese companies listed on US stock indices.
“Some investment decisions have been postponed, and foreign companies are seeking to expand their production in other countries,” said a report issued by Standards & Poor’s rating agency.