After a strong start to the year, China’s economy has clearly lost strength. The lockdowns and other restrictions imposed by the strict zero Covid strategy are slowing the second-largest economy so noticeably that stimulus measures may become necessary. While growth in the first quarter was unexpectedly strong at 4.8%, thanks to strong January and February, the economy cooled off again in March.
“Downward economic pressure has increased,” Bureau of Statistics spokesman Fu Linghui said Monday in Beijing. “Since March, the situation in the world has developed in a complicated way,” said the spokesman. “Some factors were above expectations.” The problems of Chinese companies have increased. Logistics are affected. The drop in consumption caused retail sales in March to drop 3.5% compared to the same month last year.
Can the growth target be achieved?
It is questionable whether the government can achieve its 5.5% growth target this year. Last year, a strong 8.1% was achieved, but this is due to the low base of comparison due to the pandemic in the previous year.
“The Chinese economy looks surprisingly fragile after last year’s strong economic recovery,” said Max Zenglein of the China Institute Merics in Berlin. “Without a massive stimulus package, the outlook for 2022 looks bleak.” The strict Covid policy “will continue to stifle already faltering consumption for the foreseeable future”. Exports, which are an important pillar of growth, also tend to falter as higher inflation caused by the war in Ukraine is reducing purchasing power in key export markets.
Looking ahead to the autumn party conference, at which state and party leader Xi Jinping wants to be confirmed in office, Zenglein said it was a “politically highly explosive year”. The high growth target is primarily aimed at stability in the labor market. A record number of nearly 11 million university graduates are expected to be absorbed. “China’s government will have to expand the stimulus package and rely more on infrastructure programs and state-owned enterprises to stabilize growth,” Zenglein said. “Indebtedness and risks in the financial system could rise again.”
Tens of millions of people cannot leave their homes
With the arrival of Omikron BA.2, China is facing the biggest wave of corona since the beginning of the pandemic, more than two years ago. There are curfews in Shanghai, the country’s economic and financial center, and in other major cities. Tens of millions of people cannot leave their homes. Strict corona measures, as well as slower growth, also affect German companies. Some had to stop production for weeks or complained about shipping issues. German exporters had to accept a 9.8% drop in trade with China in March.
The unexpectedly strong growth in the first quarter “so far hardly seems to reflect the war in Ukraine and the current Covid outbreaks in China,” said Jens Hildebrandt, member of the executive board of the German Chamber of Commerce in China (AHK). Meanwhile, however, domestic consumption has declined “worryingly”. What the foreign trade numbers have already signaled also applies to growth: whether the 5.5% target for the year as a whole is still realistic “seems more than questionable.”
Experts from Oxford Economics were also surprised that the quarterly figures were still strong: “We believe it mainly reflects the growth that official data shows for January and February, before economic activity weakened in March.” Outages will likely continue for weeks.
To stimulate the economy, the central bank had already announced on Friday that it would slightly reduce banks’ reserve requirements. This should provide the economy with around 530 billion yuan (76 billion euros) in long-term liquidity. However, the central bank did not go further and did not raise interest rates. All eyes are now on the government, which could announce major stimulus measures.