{"id":10283,"date":"2022-05-23T06:30:29","date_gmt":"2022-05-23T06:30:29","guid":{"rendered":"https:\/\/focus.cbbc.org\/?p=10283"},"modified":"2022-05-23T13:10:58","modified_gmt":"2022-05-23T13:10:58","slug":"can-china-pull-off-zero-covid-and-a-stable-economy","status":"publish","type":"post","link":"https:\/\/focus.cbbc.org\/can-china-pull-off-zero-covid-and-a-stable-economy\/","title":{"rendered":"Can China really pull off Zero Covid and a stable economy?"},"content":{"rendered":"

China\u2019s harsh Zero Covid policy is putting huge pressure on the Chinese economy, with April\u2019s data indicating a sharp downturn. The government wants to increase infrastructure spending and do more to help SMEs while also keeping employment stable, according to CBBC\u2019s policy team, Torsten Weller<\/strong> and Joe Cash \u2013 so how likely are they to pull that off?<\/strong><\/span><\/h2>\n

Worries about the Chinese economy are mounting. Despite respectable growth of 4.8% for the first quarter, several indicators paint a more sombre picture. Consumption data, in particular, rattled policymakers. In March, the retail sales of consumer goods decreased by 3.5% year-on-year, down from a 6.7% increase in the first two months of the year.\u00a0<\/span><\/span><\/p>\n

Last month\u2019s data confirmed Beijing\u2019s concerns. April\u2019s Purchasing Manager Index (PMI) \u2013 which measures the Chinese manufacturing sector \u2013 dropped to 47.4, the lowest figure since the beginning of the pandemic. Export data, too, weakened in April, growing only 3.9%, the lowest monthly growth since June 2020.\u00a0<\/span><\/span><\/p>\n

To stabilise the economy, the Chinese government has issued several guidelines ahead of this year\u2019s Communist Party Congress, which is expected to select President Xi Jinping<\/a> for a historic third term. Yet while most of the recent announcements targeted infrastructure and job security, it will probably fall \u2013 once again \u2013 onto China\u2019s strong export sector to save the economy and lead the recovery.<\/span><\/p>\n

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Background\u00a0<\/span><\/span><\/h4>\n

Though recent figures may still be a far cry from the dramatic slump during China\u2019s first lockdown, the global situation is much less favourable than it was in early 2020. Back then, most countries were just about to enter lengthy lockdowns themselves. Central banks around the globe were switching on the money printers to keep their economies from collapsing, and customers in advanced economies had cash to spend, as they were saving on commuting costs and other expenses. Now the situation is exactly the opposite. Most developed economies have exited lockdowns and are returning to pre-pandemic levels of economic output, monetary supply is tightening, and soaring inflation is squeezing households.\u00a0<\/span><\/span><\/p>\n

And it\u2019s not just Chinese policymakers that are worried. Foreign businesses and investors are also growing weary of the country\u2019s economic troubles. A recent flash survey by the European Chamber of Commerce in China (EUCCC) showed that nearly 60% of participating companies had reduced their revenue predictions for 2022, and about a quarter were considering shifting investment to other markets. In February and March, foreign investors pulled out of RMB 193 billion (\u00a323.3 billion) worth of Chinese bonds \u2013 the greatest outflows since the beginning of China\u2019s bond market. At the same time, early-stage investment by VCs declined by 90% year-on-year in the first quarter of 2022.\u00a0<\/span><\/span><\/p>\n

To reverse the trend, the Chinese government has released a series of policy guidelines to stabilise the economy. Four areas are crucial: infrastructure, domestic consumption, jobs and trade. This update will look at each of them and highlight the key challenges.<\/span><\/p>\n

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Year-on-year retail sales growth (left) and 2019-2022 official manufacturing PMI (right) (Source: National Bureau of Statistics)<\/em><\/p>\n

Infrastructure\u00a0<\/span><\/span><\/h4>\n

Since the financial crisis in 2008, infrastructure spending has been the default lever for Chinese policymakers to stimulate growth. So it didn\u2019t come as a surprise when, on 26 April 2022, the Central Committee for Financial and Economic Affairs \u2013 the Party organ overseeing economic and financial policy \u2013 announced a slew of new measures to speed up infrastructure spending across the country.\u00a0<\/span><\/span><\/p>\n

Most of the areas targeted relate to logistical choke points like transport networks and waterways. Logistics and supply chains were a natural victim of lockdowns with truck traffic in March 2021 dropping to 40% of normal levels. In Shanghai, traffic plummeted even further to only 15%, according to the South China Morning Post<\/em>. Other areas of investment include 5G networks, renewable energy<\/a> and data centres.<\/span><\/p>\n

Improving transport links and investing in next-gen technologies, therefore, certainly makes sense. However, speeding up infrastructure spending now also means that many of the RMB 14.8 trillion yuan (\u00a31.8 trillion) worth of planned projects will be front-loaded. This could boost growth now but lead to weaker economic activity later this year.\u00a0<\/span><\/span><\/p>\n