Covid and real estate hamper growth in China

Sudden brake: China experienced a slump in economic growth in the second quarter and posted its worst performance since 2020, driven by health restrictions and a real estate crisis that severely impacted activity.

According to official figures released on Friday, the gross domestic product (GDP) of the world’s second largest economy grew by just 0.4% over the year from April to June.

This is the weakest growth rate since the beginning of 2020, when Covid-19 paralyzed activities in China in the first quarter (-6.8%).

An early adjustment

This decline was generally expected. However, a group of analysts polled by AFP expected a much more moderate slowdown (1.6%).

Also read: A risky zero-Covid strategy in China

While caution is advised, China’s official GDP still comes under close scrutiny given the country’s weight in the global economy.

In the first quarter of 2022 is the country’s gross domestic product (GDP). was up 4.8% over a year.

The economy has faced an “extremely unusual” situation due to the international context and the Covid-19 in China, noted a National Bureau of Statistics (BNS) official, Fu Linghui.

Outcome: Quarter-over-quarter growth at the Asian giant shrank 2.6% after rising 1.3% in the January-March period.

If markets were expecting a drop, its magnitude “came as a shock,” economist Rajiv Biswas of S&P Global Market Intelligence told AFP.

Zero Covid weight

Since 2020, the country has been applying a zero-Covid policy, which consists of avoiding as much as possible the emergence of new cases through targeted restrictions, massive screenings, quarantining those who test positive and monitoring movements.

In the spring, the economic capital of Shanghai went into lockdown for two months in response to the country’s worst outbreak in two years.

A similar restriction was considered for some time in May in Beijing, the capital and center of political power.

These measures have dealt a severe blow to the economy as many companies, factories and businesses have been forced to shut down and supply chains have been under pressure.

Read an editorial: When China sneezes, the world catches cold

Unsurprisingly, Shanghai’s second-quarter GDP contracted 13.7% on a year-to-date basis.

In that context, positive growth nationally over this period is “hard to believe,” according to Julian Evans-Pritchard, economist at Capital Economics.

In June, however, retail sales, the main indicator of household spending, recovered strongly (+3.1% over one year) after declining for the third consecutive month in May (-6.7%).

For its part, industrial production rose last month by 3.9% over the year, after 0.7% in May.

The recovery of the epidemic added to the difficulties already weighing on the Chinese economy: sluggish consumption, Beijing’s turning gear against several dynamic sectors, including technology, uncertainties related to Ukraine, but also real estate crisis.

Concerned real estate

According to the SNB, prices for new homes fell again in June (-0.5% yoy). This is the second month of decline for this index, which aggregates the average price across 70 cities in China.

In addition, “a growing number of buyers are stopping to repay their monthly payments due to the economic slowdown and delays” from developers for progress of construction sites or handover of keys, points out economist Betty Wang of ANZ Bank.

This aspect of the housing crisis is “worrying” because it threatens the financial system directly, warns economist Zhiwei Zhang of Pinpoint Asset Management.

The unemployment rate was 5.5% in June compared to 5.9% in the previous month. But it rose sharply in the past month among 16-24 year olds (19.3%).

Beijing has set itself the goal of GDP growth of “around 5.5 percent” for this year, which many economists doubt will be achieved.

That figure would mark China’s weakest growth rate since the early 1990s, excluding the Covid era.

This slowdown in growth comes at a politically sensitive year, with Xi Jinping set to be re-appointed as Chinese Communist Party (CCP) leader in the fall, barring a disaster.

Read again: The construction industry under the burden of scarcity of raw materials

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