Economic storm clouds are hovering over China

Lightning lockdowns, slumping business confidence and geopolitical turmoil highlight the challenges facing Beijing

Amid Beijing’s hysteria over Taiwan, it is easy to forget China’s domestic turmoil.

Bubbling beneath the surface is a perfect storm that has battered the world’s second-largest economy. 

Coupled with the fallout from the country’s “zero-Covid” policy, it has forced the Communist Party government to ditch its 5.5% annual growth target.

A decision that President Xi Jinping’s administration was loathed to make. Yet entirely predictable.

Behind the scenes, the meltdown of giant developer Evergrande has sent shockwaves through the property sector and spooked the banking industry.

Anemic consumer spending and spiraling unemployment among the 16 to 24 age group have also highlighted the “risks” facing President Xi Jinping’s administration. 

“China’s economy faces multiple challenges and potential risks,” Xu Hongcai, the deputy director of the Economics Policy Commission at the China Association of Policy Science, said last week.

“In the short term, several factors will weigh on economic recovery, including imported inflationary pressure, high unemployment among youth, subdued consumer spending, a profound adjustment in the real estate market, and turbulence in global financial markets,” he wrote in a commentary for China-US Focus, an academic website.

“In the long run, an aging population, a shift of gears from old to new growth drivers, and heightened competition between China and the United States will also pose challenges to the sustainable development of the Chinese economy,” he pointed out.

Stagnation is what everyone is worried more [about] after second quarter [GDP] fell into a hole.

Nie Wen, of the financial firm Hwabao Trust

Between the lines:

  • Manufacturing activity and business confidence have taken a massive hit.
  • Numbers released on Monday illustrated a stagnating economy.
  • Property sales in 17 cities slumped by 33% in July, the China Index Academy, one of the nation’s largest independent real estate research firms, reported.
  • Flash lockdowns across the country have only added to the chaos even though Covid-19 infection rates are “officially low.”

What was said: “Stagnation is what everyone is worried more [about] after second quarter [GDP] fell into a hole,” Nie Wen, an economist at financial firm Hwabao Trust in Shanghai, said as reported by the Reuters news agency.

Delve deeper: “There was NO meaningful June recovery … [and] July is more of the same. They [businesses] simply don’t believe that their Covid Zero nightmare is over,” China Beige Book, the research consultancy, tweeted.

Big picture: “There seems to be a real conflict within policymaking circles whether or not to focus on consumption as the driver of growth or simply to return to the old days of expanding investment and subsidizing manufacturing,” Michael Pettis, of the Carnegie China Center and finance professor at Peking University, tweeted.

China Factor comment: On top of the economic threats, Beijing has ramped up the rhetoric on near neighbor Taiwan. The bellicose comments were made ahead of a planned and controversial trip to the democratic island by US House Speaker Nancy Pelosi this week.