China’s economy skids as Covid lockdowns hit industrial output
China’s economy is paying the price for the government’s zero-Covid policy, with industrial output and consumer spending sliding to the worst levels since the pandemic began and analysts warning of no quick recovery.
Industrial output unexpectedly fell 2.9 per cent last month from a year ago, while retail sales contracted 11.1 per cent during the same period, weaker than a projected 6.6 per cent drop. The unemployment rate climbed to 6.1 per cent and the youth jobless rate hit a record.
China’s economy has taken a hit from the government’s efforts to keep the virus at bay, with major cities such as Shanghai locked down for several weeks and restrictions in many other places cutting into spending, shutting factories and blocking supply chains.
The government is insisting on sticking with its zero-Covid strategy to curb infections, even though the high transmissibility of the Omicron variant puts cities at greater risk of repeatedly locking down and reopening. Shanghai is slowly starting to reopen, but it is likely to take a long time for businesses to return to normal operation.
Zhang Zhiwei, chief economist at Pinpoint Asset Management, said it was possible the economy could contract in the second quarter, putting the government’s full-year growth target of about 5.5 per cent further out of reach.
While the “government faces mounting pressure to launch new stimulus to stabilise the economy” the effectiveness of any new policies depends on how Beijing adjusts its zero-tolerance policy against the Omicron crisis, he said.
China’s benchmark CSI 300 stock was down 0.8 per cent at the close of trading yesterday. The onshore yuan was little changed at 6.7895 per dollar, while the yield on 10-year government bonds rose 1 basis point at 2.83 per cent. Healthcare and consumer staples stocks were the worst performers in the CSI 300 Index.
“The impact was much wider and deeper than expected,” said Chang Shu and Eric Zhu of Bloomberg Economics. “The data point to a deeper slowdown this year than expected.”
Beijing has hinted at increased support for the economy, with Premier Li Keqiang recently urging officials to ensure stability through fiscal and monetary policy.
The People’s Bank of China on Sunday tried to ease a housing crunch by reducing mortgage rates for first-time homebuyers. However, it left the interest rate on one-year policy loans unchanged yesterday, as inflation pressure and worries about capital outflows reduce the scope for more easing.
“It is clear that the impact of lockdowns, or the fear of lockdowns, overwhelmed any economic easing, and the Shanghai lockdown had ripple effects across the nation,” said Wei Yao, chief economist at Societe Generale and its head of research for Asia Pacific. The jump in the jobless rate will be of particular worry to China’s leadership, Ms Wei said.
“If this set does not raise the urgency of adjusting the zero-Covid measures to allow the economy to normalise, we don’t know what will.”
The National Bureau of Statistics said the Covid outbreaks had a “big impact” on the economy last month, but the effects are likely to be short-lived. “With progress in Covid controls and policies to stabilise the economy taking effect, the economy is likely to recover gradually,” it said.
Fixed-asset investment increased 6.8 per cent in the first four months of the year, probably supported by the government’s push to expand infrastructure spending. However, cement output was down 18.9 per cent last month and production of crude steel and steel products dropped more than 5 per cent. The production of cars plunged 44 per cent and total manufacturing output dropped 4.6 per cent.
The authorities put a bullish spin on the numbers, with the official statement saying the “general trend of high-quality development remained unchanged despite the increased downwards pressure”.
Monetary stimulus is proving less effective in the face of Covid lockdowns, with data on Friday showing businesses and consumers had little appetite to borrow. Credit growth weakened sharply last month, with new yuan loans sinking to the lowest level since December 2017.
Banks could cut their main lending rates on Friday, which would help to further lower mortgage rates for homebuyers after the cut announced by the PBOC at the weekend. But economists see the impact as fairly limited for now. “It takes more than just a simple interest rate cut to boost the credit demand,” Helen Qiao, economist for Greater China at Bank of America, said.