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Beijing’s unwavering zero-Covid strategy further came under fire last week, when the World Health Organization’s director general labelled it “unsustainable”. illustration by Lau Ka-kuen

Economy China Economy

With China firmly on a zero-Covid trajectory, concerns are turning to ‘growth recession’ risks

Beijing’s handling of the coronavirus has vast implications on every facet of Chinese people’s lives, and on a world that has come to rely so heavily on China
Even as the government attempts to censor those who disagree with its Covid policies, fears of economic recession spark warnings and curb consumption

China's economic recovery

Frank Tangin Beijing

Published: 12:00am, 18 May, 2022

Why you can trust SCMP

Beijing’s steadfast adherence to rigid citywide lockdowns to combat the highly contagious Omicron coronavirus variant is gradually changing the narrative, with questions shifting from how far will the central government go, to how big of an economic hit the country can afford to take.

There are abundant suggestions in economic circles that the world’s second-largest economy is seeing its growth path undermined as Beijing prioritises saving lives at all costs.

And as top leadership attempts to shore up confidence, with repeated assurances that it has the necessary tools and plans in place to counter headwinds, analysts are warning about what they see as severe consequences ahead.

Some are pointing to rising instability among the nation’s most vulnerable groups. Others warn of a “growth recession” – very slow economic growth accompanied by rising unemployment.

And some say China is at risk of a double-dip recession, similar to what the US saw in the early 1980s – a recession, followed by expansion, followed by recession again.

‘We must stabilise foreign investment’: experts warn of China exodus

Beijing’s unwavering zero-Covid strategy further came under fire last week, when the World Health Organization’s director general labelled it “unsustainable”.

Such accusations threaten the highly valued legitimacy of the Communist Party, particularly with respect to its gross domestic product (GDP) growth goals, promises of common prosperity and its desired perception of greater opening up.

And if that were not enough for Chinese leadership to contend with, external factors are further ramping up the pressure.

Challenges faced by the US Federal Reserve’s interest rate hikes, commodity price inflation triggered by the Russia-Ukraine war, and various geopolitical disputes are all weighing heavy on Beijing as it seeks stability ahead of a leadership reshuffle at the Communist Party’s 20th national congress later this year.

“The current situation is worse than during the global financial crisis in the sense that some economic activity is not even permitted right now,” said Derek Scissors, a fellow with the American Enterprise Institute, a Washington-based think tank.

The danger is Covid lockdowns and other economic weaknesses extending into the third quarter

Derek Scissors, American Enterprise Institute

The latest pandemic waves have plagued dozens of Chinese cities, with the mobility of people and goods greatly restricted. Total cases reported since March, including asymptomatic infections, have surpassed 600,000 – far more than during the initial outbreak in Wuhan in early 2020.

The month-long lockdown of 25 million people in Shanghai, a national commercial hub, generated considerable outcry. In contrast, major Western economies have chosen to live with the virus, with their daily lives and economic activities gradually returning to a relatively normal state following vaccinations.

Scissors said the negative effects in China will be reflected in “quite poor” national economic figures for the second quarter, and this could put investor expectations in a tailspin.

“The danger is Covid lockdowns and other economic weaknesses extending into the third quarter. That would depress results for 2022 and cause businesses and consumers to see Covid as a greater future risk, depressing their activity in 2023 as well,” he warned.

02:30

Shanghai doubles down on quarantine measures in Covid-19 fight

But its pandemic control policy is just one of the hurdles that China is facing. Russia’s invasion of Ukraine has set off a new round of commodity price hikes, hurt globalisation efforts, and put China – which has not condemned its northern neighbour’s aggression – at growing odds with Western countries that are major destinations for Chinese goods.

“China will face greater uncertainty and larger shocks than those from the 2008-09 global financial crisis if the overlapping impact of the coronavirus epidemic spreads, [and if] the escalating Russia-Ukraine conflict and the China-US macro policy divergence cannot be reversed,” Wang Yongli, a former vice-president at the Bank of China, one of the Big Four state-owned banks, wrote in an article posted on Sina.com last month.

Wang warned of the risks of a sharp economic downturn and severe stagflation.

“The challenges may be comparable to the economic overheating and financial chaos that erupted in 1998-99,” he added, referring to the tumultuous period following the Asian financial crisis. “We must stay on high alert and make policy preparations for major shocks.”

China should vaccinate the elderly as quickly as possible and give up on zero-Covid

David Zweig, HKUST

Chinese authorities have acknowledged three-fold pressure – contraction of demand, supply shocks and weaker expectations – since late last year. With plans for more government spending on infrastructure, leaders set an ambitious economic growth target for 2022 of “ around 5.5 per cent” before the current Omicron wave.

The initial economic damages began appearing in March, with retail sales plunging 3.5 per cent, and the impact could become more apparent when the second-quarter economic data is released.

“It seems, to me, impossible to shut down Shanghai for such a long period of time and honestly make the planned GDP numbers,” said David Zweig, a professor emeritus with the Hong Kong University of Science and Technology.

“China should vaccinate the elderly as quickly as possible and give up on zero-Covid.”

Sheng Songcheng, former head of the Chinese central bank’s statistics department, said the second-quarter GDP growth is likely to slow to around 2.1 per cent from 4.8 per cent in the first quarter.

China censors more economists after critical takes on zero-Covid

“It is vital to prevent the pandemic from having a long-term impact,” a research note, under Sheng’s direction, said in early May.

“We must pay close attention to the survival of market players, improve expectations, boost domestic demand, and prevent the epidemic from causing irreversible damage to China’s manufacturing industry.”

The slowdown of the world’s second-largest economy is also fraying nerves overseas, as China is a major engine for the global economy, including in turbulent years.

Long-term China bull Stephen Roach pointed out in early May that China was facing “formidable pressures” and would “be lucky if it makes 4” per cent, in terms of GDP growth.

“China … is not going to bail the world out the way it did after the global financial crisis,” Roach told a CNBC programme.

Mary Lovely, a China expert at the Peterson Institute for International Economics, a Washington-based think tank, saw some “serious danger signs” in consumption and net exports, two major growth drivers, warning that China could experience a “growth recession” in the current quarter.

China’s official surveyed unemployment rate rose to 6.1 per cent in April, staying above this year’s control target of 5.5 per cent and approaching the worst level of 6.2 per cent in February 2020.

The jobless rate among people aged 16-24 was as high as 18.2 per cent in April, and it could rise further as a record 10.76 million college graduates enter the job market this summer.

But despite the mounting pressure, heavy-handed pandemic control measures remain in place, and Beijing has stepped up censorship of naysayers and those who would question the party’s chosen path.

“We must unswervingly adhere to the dynamic zero-Covid policy, and combat any rhetoric and actions that distort, doubt or deny our country’s anti-epidemic policies,” party mouthpiece Xinhua reported, citing a meeting of the seven-member Politburo Standing Committee earlier this month.

Xi says China’s Covid policies will ‘stand the test of time in Shanghai’

Meanwhile, authorities keep telling the rest of the world that China has an assortment of reserve tools to shore up its economy.

In the quarterly economic analysis issued in April, the Politburo vowed to speed up the implementation of existing tax-cut and supportive policies, as well as the use of new monetary policy tools and effective investments.

There were also indications last month that the government might loosen its restrictions on tech firms and property developers.

But leaders continue to shy away from issuing direct stimulus payments to Chinese citizens, such as those seen in the United States.

The People’s Bank of China, the nation’s central bank, continues to insist that there are no plans to flood the economy with liquidity.

The time for aggressive economic policy, whether stimulus or reform, is after the health crisis eases

Derek Scissors, American Enterprise Institute

Scissors, with the American Enterprise Institute, said that calls for stimulus payments during a health emergency are calls for wasteful spending.

“In 2008 and 2009, China went from being a low-debt to a high-debt country due to heavy borrowing,” he said, referring to when China rolled out a massive 4-trillion-yuan (US$590-billion) stimulus package.

“The time for aggressive economic policy, whether stimulus or reform, is after the health crisis eases.”

The build-up of trillions of yuan worth of local debt, and the need to prevent that debt from ballooning out of control, are critical factors behind Beijing’s decision not to issue across-the-board stimulus payments.

Is China using a ‘shadow stimulus’ to shore up economic growth?

But this path means that dwindling consumption must be reinvigorated by other means if China is to achieve its economic growth targets.

Zhang Bin, deputy head of the Institute of World Economics and Politics under the Chinese Academy of Social Sciences, warned in a recent report: “While working toward the planned GDP growth target, we need to pay special attention to two livelihood-concerning indicators: consumption and employment.”

Zhang said fiscal policy adjustments are the best ways to address plights in service sectors, small businesses and among self-employed people.

He added that, in light of the nation’s “pandemic-control measures, special subsidies for affected industries and workers; funding support for business resumption; and temporary subsidies for low-income people, senior citizens and children, would be helpful”.