There is no magic vaccine to resuscitate China’s ailing economy.
A toxic dose of never-ending Covid-19 lockdowns, plunging retail sales and a struggling property market illustrate the challenges facing Beijing.
Global inflation triggered by a rise in commodity prices, such as oil, gas and grain, has only added to what many analysts have described as the “perfect storm.”
“We told you it was going to be ugly,” China Beige Book, the influential research and consultancy group, tweeted on May 16 after the National Bureau of Statistics released a raft of eye-watering numbers.
- Retail sales shrank 11.1% in April compared to the same period last year.
- It was the biggest contraction since March 2020.
- China’s auto sales plunged 47.6% during the same period.
- Property sales by value in April slumped 46.6% from a year earlier.
- Industrial output was also down 2.9% while manufacturing production dropped 4.6%.
- A knock-on effect was a 4.3% contraction in electricity demand and a 5.2% dip in crude steel output.
Danger signals: But the biggest headache for President Xi Jinping’s ruling Communist Party was spiraling unemployment. In 31 major cities, the jobless data stood at 6.7% for April year-on-year. That was the highest rate since records began in 2018.
Delve deeper: Part of the problem has been Xi’s “zero-Covid” strategy. Last week, Japan’s investment bank Nomura estimated that more than 373 million people in 45 Chinese cities were living under some form of lockdown in April.
Loss of confidence: “China is losing its credibility as the best sourcing location in the world. With the current situation comes a huge loss of confidence, which will eventually lead to changes in supply chains,” Joerg Wuttke, the president of the European Union Chamber of Commerce in China, pointed out in an interview with CHINADebate.
Big picture: Political blunders and a flawed economic policy will eat into the official GDP growth target of 5.5% this year. But then, Michael Pettis, of Carnegie China and a professor of finance at Peking University, has questioned the whole process.
What he said: “It’s a mistake to view China’s growth in terms of whether it can or cannot achieve a particular GDP target. [This] is not a measure of the country’s economic output and performance in the same way the statistic is for other major economies.”
Why not? China is inflating GDP by piling up debt on non-productive infrastructure and real estate projects to meet government “growth” targets. Instead, Beijing needs to wean itself off these economic steroids.
Beijing’s next move: In his essay, The Only Five Paths China’s Economy Can Follow, Pettis suggests that President Xi’s team might be forced to take the last route to salvation.
Cold turkey: “[This involves reducing a] large amount of nonproductive investment on which it relies to drive growth and replace it with nothing, in which case growth would necessarily slow sharply,” Pettis wrote on the Carnegie Endowment for International Peace’s website.
How would that play out: “In my opinion, China [would] face a very long, Japan-style, period of low growth,” Pettis said at the end of last month before the latest red-ink numbers were released.
China Factor comment: We have been pointing out that official economic data is unreliable. In December, even the State Council, the chief administrative authority of the People’s Republic of China, was forced to issue new guidelines after a damning assessment. Since then, the economy has continued to slide and there is now a real risk of it falling into a recession. If that happened, shockwaves would reverberate across the world.