Covid Lockdowns have caused Chinese Economy to Crumble

Photo Credit: AP Photo/Kin Cheung

The Chinese economy is in a slump, recording its lowest since 2020. The gloomy condition of the economy in China is significantly linked to the Covid lockdowns imposed across the country.

Major economic hubs in China have repeatedly opened and closed several times because of the stringent zero-Covid policy that the government of China wants to achieve. It can be noted that operations start when there is a drop in Covid cases; however, operations halt after cases begin to surge again.

The National Bureau of Statistics reports that within three months, the Gross Domestic Product upsurged by only 0.4%. That is a low percentage, considering that China is the world’s second-largest economy.

The previous quarter showed a 4.8% increase in GDP; while this is higher than the current quarter, the number is still low compared to the same period taken before the lockdowns were put in place. Meanwhile, China’s GDP surged down by 2.6%.

As per expectations by the Chinese government, its economy should expand by 5.5%. However, the current data reveals that the economy only expanded by 2.5%, almost only half of what the government hopes to achieve. With the present conditions considered, authorities in Beijing have expressed that it would be a challenge for them to reach the optimal growth percentage within the year.

Fu Linghui, a spokesperson from the National Bureau of Statistics, told the press, “There are challenges to achieving our expected economic growth target for the whole year.” Despite these challenges, however, Fu remains hopeful that the second half of the year will be friendly to China’s economy.

Factors mounting another

The economy in China and its current difficulties can be traced down to several factors which mount over the other. The very reason for the slump in the economy is the zero-Covid policy of the country. And this has only been exacerbated by social protests in many parts of China, as well as the incurrence of bank debts. These conditions prohibit businesspeople and ordinary citizens from recovering.

The city of Beijing is one that has been battling Covid with an iron fist. Unintentionally, the strong policies against Covid spread only worsened the economic conditions – closing down almost all business establishments that were necessary to keep currency flowing.

Meanwhile, Chinese authorities tried reopening the economy last month. At the very least, businesses were starting to recover. However, even with the latest move by the government, many executives – and even consumers – still feel uncertain about totally reinstalling operations. Just this June, the unemployment rate of the youth was at 19.3%.

A global market strategist from JP Morgan Asset Management, Chapping Zhu, explained that the latest quarter “reflected the significant shocks from the Omicron outbreak and corresponding stringent measures adopted in major cities.”

“Looking forward, we expect to see continued economic recovery in the second half of this year, mainly supported by government-led infrastructure investment,” he added.

What China needs to do

Covid restrictions should be eased if the Chinese government wants to curb the worsening condition of its economy, says Zhu. He adds that if this happens, the outlook of business owners will get better, as well as the confidence of consumers.

Macquarie Group economist Larry Hu posited that the economy should have grown by 7% in the next quarter if the country wants to achieve its expected growth. “It is impossible without a significant escalation of policy stimulus from the current level,” he said.

The reopening of the economy has led other establishments to breathe. Meanwhile, the property sector is facing grave challenges. Last year in June, investments in real estate went down by 9.4% – an addition to the 7.8% drop in May. Macquarie Capital reports that the sales of property per floor plunged 18% a month ago, adding to the 32% drop this May.

“The property woe is causing rising social instability, evidenced by the recent mortgage boycott,” said Hu.

Zhu from JP Morgan Asset Management said, “Decisive and effective regulatory measures must be taken to prevent the mortgage boycott from developing into a systemic risk.”