China’s economy worsened in October in key areas, as Covid cases surged and existing headwinds showed little signs of abating.
The world’s second-largest economy saw both its consumption and production gauges fall last month, the statistics bureau reported Tuesday. They were expected to weaken slightly, but did so more than economists forecast.
The declines come at a perplexing time. China recently rolled out numerous measures to relax its strict Covid containment policy, which has closed businesses, disrupted supply chains, and kept consumers’ wallets closed. Markets have risen as opening measures were announced.
Yet China’s long-awaited relaxing comes as one of its worst waves of infections sweeps across the country, hitting economically vital centers.
“October data indicate just how much pressure China’s zero-Covid policy is putting on the demand side of the economy and suggest, if cases continue to rise during the rest of the winter, that the numbers will be as bad over the rest of the year,” said Michael Pettis, finance professor at Peking University.
“Analysts expected retail sales to match last month’s very poor 2.5% increase, but instead, retail sales were down,” he told Barron’s. That means the consumption share of China’s economy—which policy makers have long said they want to boost—has dropped from an already low level, he said.
Moreover, those living among outbreaks aren’t clear on Beijing’s Covid-related directives.
The global manufacturing center of Guangzhou recorded more than 5,000 new cases on Tuesday, far higher than the number that set off what became the complete lockdown of Shanghai months ago. Yet authorities have not imposed a blanket lockdown, and are instead attempting district-by-district restrictions, according to local media and residents.
“We’ve been told nothing. Our friends about two kilometers away have been told not to leave their compound,” Xu Wei, a 52-year-old construction contractor, told Barron’s Tuesday.
Businesses have felt the effects for months. “China needs consumers to start spending money,” said James Zimmerman, a partner in the Beijing office of Perkins Coie and former chairman of the American Chamber of Commerce in China.
Retail sales, a rough measure of domestic consumption, contracted for the first time in six months, falling 0.5% year-over-year from September’s 2.5% rise. China’s engine of growth, industrial production, also weakened below expectations, falling to 5% from the previous month’s 6.3%.
“Retail sales are tanking because of constraints on mobility. If people can’t leave the house or their communities—including to travel abroad or to just go across town—they don’t spend money. Then, as the numbers keep tanking, businesses start to lay off workers or cut salaries, further impacting consumer confidence,” Zimmerman told Barron’s.
China’s headwinds are combining to push its economy into one of its worst years in decades. “The foundation of the domestic economic recovery is not solid,” China’s National Bureau of Statistics (NBS) said in a written summary of the October data.
Besides the crippling Covid restrictions, an ongoing property-market crisis is dragging down growth, and the Biden administration has surprised Beijing by ratcheting up its trade-war silos.
On Monday, Chinese leader Xi Jinping met with U.S. President Joseph Biden in Indonesia, their first face-to-face discussion as leaders. Taiwan and economic issues dominated the discussions, according to official summaries from both sides.
Yet China seems to have miscalculated two major economic factors, said Victor Shih, the Ho Miu Lam Chair in China and Pacific Relations at the University of California, San Diego, and an expert on Chinese elite politics.
One, that the Biden administration would usher in more conciliatory policies than the hard-nose approach of the Trump administration. Not only has Biden not rolled back Trump’s punitive measures, he has aggressively imposed further technology restrictions.
Secondly, Chinese officials thought the pandemic would devastate the American economy. “With Covid, the U.S. is going to be finished economically,” Shih said, summarizing Chinese officials’ initial presumption.
“That perception is changing. The U.S. is going to continue to be around,” Shih told Barron’s.
Write to editors@barrons.com
Read the full article here
Discussion about this post