At China’s Two Sessions meeting in March this year, Premier Li Keqiang set a target of 5.5% economic growth for the country this year. Apparently, when this goal was set, the Chinese policymakers did not anticipate that two factors, namely the outbreak of the war in Ukraine and the strict measures to contain COVID-19 in various places within China itself, would eventually strongly affect the Chinese economy. As things stand, these unexpected circumstances carry huge impacts. The country's economy has been hit hard, with economic growth being merely 2.5% in the first half of the year and as low as 0.4% in the second quarter.
China’s Economic Growth (Year-on-Year for Q2), 2019 – 2022
Source: National Bureau of Statistics, chart plotted by ANBOUND
With China's economy being affected in the first half of the year, Premier Li said at a symposium of experts and entrepreneurs on July 12 that the unforeseen factors brought about a serious impact on the country, and new downward pressure on the economy has increased, where the main indicators dropped significantly in April. To this end, China's State Council released a set of measures to stabilize the broader economic market. The effect of the policy manifested quickly, the decline of major economic indicators narrowed in May, while the economy stabilized and rebounded in June. However, the foundation of economic recovery remains unstable, and there are many uncertainties in the development environment. All in all, it will take arduous efforts to stabilize the economic market.
Looking back at the global geopolitical and geoeconomics situation over the past six months, the situation facing China is rather awkward. It is in Europe that the war in Ukraine broke out, and the countries directly involved are Russia and Ukraine, with two sides of the game being Russia and the Western countries led by NATO. Although the energy and food crises caused by the war affected the whole world, the main impact is on European countries. Even if China's strategic partnership with Russia has been criticized by the West, as a whole, it has stayed away from the war, both in terms of geographic space and economic linkages.
On the surface, the current situation actually provides China with a rare window opportunity for it to develop its economy, more so than the U.S. and Europe. China is not involved in the war, is not sanctioned by the U.S., has a huge domestic market, and is in a peaceful and stable environment, while the attention of the U.S. and Europe is diverted by this war for the time being. Its huge production capacity and market space too, are conducive to strengthening ties with the world economy. However, its economy suffered a major blow in the first half of the year, and the damage was no less than the impact of the outbreak of the COVID-19 pandemic in 2020.
The key to the problem lies in the impact of the COVID-19 outbreaks in the first half of the year. More specifically, the impact can be divided into two aspects: one is the sporadic outbreaks of the pandemic in many parts of the country; the other is the strict measures against it. The Omicron variant is not exactly terrifying judging from its viral load, hospitalization rate after the infection, severe illness rate, and fatality, and neither does it cause a major constraint on medical resources. Nonetheless, China imposed extremely strict measures to curb the infections.
Large-scale lockdowns were imposed from time to time in some cities, and this time, unlike Wuhan, where only one city was under lockdown in early 2020, first-tier cities such as Shanghai, Shenzhen, and Beijing were all closed off to varying degrees. This had effectively frozen the economic activities and personnel flows of these cities.
When the outside world is under the impact of the war in Ukraine, China is caught in another war, the war of “dynamic COVID-zero” under its strict lockdown policy. In the face of the high infection rate, low severity rate, and extremely low fatality rate of the Omicron variant, when China set the goal of "dynamic clearing", it undoubtedly set itself a very high standard. In 2022, unlike the panic caused by the unknown in early 2020, there are already several vaccines, and the world now understands the novel coronavirus better with considerable progress in medical treatment. Yet, China still adopts the exact same strategy and approach as it did in early 2020.
If the COVID-related measures and economic losses in Shanghai, Beijing, and other places are comprehensively considered, there are many aspects worth the Chinese authorities reflecting on. While the rest of the world is concerned about the war in Ukraine, China is waging the war on the novel coronavirus under the high anti-COVID standard. Perhaps in the near future, when it looks back at what happened in the world and the situation of the country itself in the first half of 2022, China will find that it has wasted an important window of economic opportunity and failed to exert its role as a huge, peaceful market when the war broke out in Ukraine, where it did not seize the opportunity to recover its economy. On the contrary, China's main economic pillars (Yangtze River Delta, Beijing-Tianjin-Hebei, Pearl River Delta) were constrained to varying degrees due to the strict COVID-measures, disrupting its established economic development. This has also greatly reduced the room for its structural adjustment and mitigation of economic risks. The profound economic risks that China has been worried about are emerging, especially the rapid deterioration of the real estate market and local finances, which are fast approaching financial institutions, and may very well induce systemic financial risks.
The current problems and situations facing the Chinese economy are unique, and cannot be drawn from the analysis of economic data. While financial experts, investment bank analysts, and economists are clamoring to analyze the data, the peculiarity of these problems has to be located in reality. The tracking and observation of ANBOUND reveal that many risks are constantly spreading:
(1) The waves of halting loans by individual home buyers are expanding; (2) Small and medium-sized contractors engaged in development have joined in such waves; (3) There is an increase in the defaults of large real estate giants. When these giants fall, it will at least partially cause huge shocks; (4) Some businesses that have disappeared have not resumed or are having difficulty doing so in the short term, such as education and training industries, travel agencies, hotels, business services, etc.; (5) Debt defaults continue to expand, in corporate, government, and residential sectors at the same time; (6) Abnormal financial activities, including restrictions on withdrawals, are increasing. Illegal financial activities that lack supervision, as well as local financial risks, are spreading toward social risks; ( 7) There is a potential depreciation prospect of the RMB exchange rate, which may bring related effects; (8) The performance of the Chinese stock market remains unstable, the original target of healthy development has not been achieved, neither has a stable investment market been formed; (9) Financial difficulties and chaos in the fiscal discipline have occurred from time to time; (10) Against the backdrop of weak economic growth rates, there is doubt in both the ability and prospects of China's economic growth; (11) The conflict between the dynamic clearing policy and the economic order still exists; (12) The problem of unemployment is worsening, and forms a negative cycle with weak consumption; (13) There is a lack of confidence among businesses and consumer.
While most of the above-mentioned problems have existed even before the outbreak of the pandemic, under the slowdown of economic growth brought about by strict COVID-related measures, these problems continue to deteriorate, and the room for mitigation has been greatly reduced as a result. For China's economic recovery and policy arrangements in the second half of the year, it is then necessary to adjust its COVID-related measures, and not mechanically repeating what it did in the first half of the year.
Premier Li proposed in his recent speech that China needs to efficiently coordinate its COVID-related measures with economic and social development, seize the important window period for economic recovery, and focus on development as the basis of problem-solving. He also mentioned the importance to stabilize market players, employment, and prices, so as to consolidate the foundation for economic recovery in the third quarter and promote the economic operations to return to normal. The Premier also pointed out that to keep the economy operating within a reasonable range, it is necessary to cope with the dilemma of stabilizing growth while preventing inflation, including imported inflation. To maintain the continuity of macro policies, he said, it is necessary to strengthen the implementation of policies that stabilize the economy. A highly crucial issue that he noted is that in the second half of the year, China will need to make overall plans to prevent one-size-fits-all policies. Researchers at ANBOUND believe that this reflects the adjustments and changes made by the central government based on the situation in the first half of the year.
Final analysis conclusion:
With the international geopolitical situation becoming turbulent, and the geo-economic landscape changing under the backdrop of the war in Ukraine, China actually possesses a unique window of opportunity. It should coordinate and balance its COVID-related measures and economic development, seize the window of economic opportunity, and promote the recovery of its economy, so as to provide greater buffer space to mitigate and address various structural risks.
