China’s Economy Struggles as Impact of Shanghai Closure Persists
The closure of Shanghai, a city with a population of 25 million, has had a profound impact on China’s economy. Comparisons between this spring and last spring fail to capture the true economic performance of the country, according to Diana Choyleva, the chief economist at Enodo Economics in London.
Instead, analysts suggest that a more accurate measure of the economy can be observed by comparing the second quarter of 2023 with the previous three months, after the “zero Covid” policy was abandoned. This comparison reveals that output in the second quarter was only 0.8 percent higher than in the first quarter, indicating a growth rate of just over 3 percent per year, down from about 9 percent in the first quarter.
Several warning signs are flashing for China’s economy. Exports have plummeted, particularly in June, while weak spending has pushed the country towards deflation. Consumer prices remain flat, and wholesale prices paid by companies are actually falling. Housing prices have also been declining, affecting both smaller and larger cities.
Moreover, investment has stumbled, with foreign companies showing little interest in increasing their presence in China. Local governments are experiencing a cash shortage, leading to service disruptions such as the suspension of most bus services in the city of Baoding.
Wang Dan, the chief economist at Hang Seng Bank China, describes the economic recovery as weak, stating that “it’s not a strong recovery.” The National Bureau of Statistics reported that industrial production increased by only 4.4 percent last month, and retail sales rose by 3.1 percent compared to the previous year. Additionally, exports in June were down 12.4 percent from the same month last year.
Last year’s Shanghai lockdown resulted in retailers in the United States and Europe ordering up to three months’ worth of inventory from Chinese factories. However, current orders have decreased by half due to delivery delays, temporarily depressing Chinese exports. Furthermore, some companies are actively relocating their supply chains out of China, which will have a longer-lasting impact.
Workers in China are also facing challenges, with incomes remaining weak. Unemployment among 16-to-24-year-olds reached 21.3 percent in June, the highest level since the statistic began being recorded in 2018.
Amidst these economic troubles, Lou Jiwei, a former finance minister, publicly recommended increasing government spending by $208 billion to $277 billion this year to stimulate the economy.
Despite the struggles, there are a few positive indicators. Unemployment for individuals aged 25 to 59 remains low at 4.1 percent, and car sales saw an increase of 8.7 percent in June compared to the previous month.
The impact of China’s economy on global growth is significant. While the country has pursued a self-reliance campaign to increase domestic production, it remains the largest importer of food, oil, and many other commodities. However, falling prices of key goods such as pork and the declining housing market have dampened consumer spending and wealth building.
Many economists believe that China’s future demand for goods and services will depend on policy decisions made by Beijing. Some, like Mr. Lou, call for a significant spending program to create jobs and stimulate consumer activity. However, the accumulation of debt, particularly at the local government level, complicates this approach. As a result, officials have relied on monetary policy measures such as interest rate cuts.
Without comprehensive policy responses, including monetary measures, experts do not anticipate a significant economic recovery in China.
Li You contributed to the research for this article.