A terrible second quarter

‘Zero-Covid’ means zero growth. That was one way of responding to China’s latest economic data at the end of last week, which showed that GDP growth slowed to 0.4% in the second quarter compared to a year ago.

It was the second worst performance in 30 years and trailed only the first quarter of 2020, when the Chinese economy shrank 6.8% during the initial outbreak of Covid-19.

GDP actually fell by 2.6% in the three months to the end of June measured against the previous quarter. Performance was better in June than in the previous two months, allowing a little optimism that the worst may have passed. But the economy only expanded 2.5% in the first six months of the year, well below the levels needed to meet the full-year growth target of “around 5.5%” set by the State Council for 2022.

The state media tried to sound supportive with commentaries about an anticipated rebound over the final months of the year. But the likelihood is that China is going to miss its GDP target in an unprecedented way. Senior figures know it as well, which is why they have been making an effort to reframe the debate.

At a press conference last Friday Fu Linghui from the National Bureau of Statistics admitted that there were “challenges” in achieving the government’s desired number, but pointed to indicators in the second quarter that at least showed a halt to the downward trend.

Describing the likely impact of Covid as “short-lived”, he also highlighted how inflation in China was well below that in the US and Europe.

Liu Yuanchun, the president of Shanghai University of Finance and Economics and a respected voice among senior figures in the Politburo, gave a similar message in an interview with 21CN Business Herald, saying it was “improper” to “overly emphasise” the yearly growth target because it was set before the latest round of Covid outbreaks and that it hadn’t taken “dramatic changes” in the global economy into account.

Li Keqiang then tried to strike a more positive tone on Tuesday in further remarks about how the economy had stabilised in June.

But the Chinese premier also seemed to be signalling that the full-year growth target was out of reach. “As long as employment is relatively sufficient, household income grows and prices are stable, slightly higher or lower growth rates are both acceptable,” he told business leaders at an online session of the World Economic Forum.

The unemployment rate for 16-24 year olds is of particular concern, climbing to a record 19.3% last month. As China’s domestic media pointed out, the number of college graduates coming into the job market this summer is also expected to hit a record 10.76 million, according to figures from the Ministry of Human Resources and Social Security.

Unemployment at these levels is “staggering in the Chinese context”, the Financial Times added in an editorial. “For one thing, such a ratio is far higher than in the US, Europe or Japan. For another, many of those searching in vain for jobs are university graduates – the hope of a generation that Chinese leader Xi Jinping has exhorted to lead a high-tech transformation.”

Much of the damage to the economy was done by the lockdowns in Shanghai and nearby cities in April and May (Shanghai’s economy contracted 13.7% in the second quarter from a year earlier), with some of the restrictions also extending to Beijing, the capital, for parts of the same period.

Most of these restrictions had been lifted by early June, however, raising hopes that the economy was on its way to resuming more normal activity.

Yet there is little sign that the wider struggle with Covid is over, with at least 20 provincial-level regions announcing increases in locally transmitted cases over the last few days.

There are also warnings from epidemiologists that a wave of at least 10 new variants of the virus is threatening inland and smaller cities, many of which are less equipped than the larger metropolises to counter new outbreaks.

Chengdu in Sichuan has just reduced public access to ‘confined spaces’ in the city for a week in a bid to slow local transmission of the virus, while Lanzhou in Gansu has extended restrictions on movement in most districts for another week. More than 2,000 tourists were also stranded in the coastal city of Beihai in Guangxi after it recorded 450 infections over a five-days period. Officials then locked down urban areas and ordered the mass testing of 1.9 million residents over the weekend.

“I just finished my three months of lockdown in Shanghai. I came to Beihai for a breath of fresh air, did I annoy someone?” one exasperated holidaymaker said of her latest predicament in a posting on social media platform Douyin.

Optimists will argue that most of these flare-ups are happening outside the southern and eastern regions of China that power much of its economic growth. The central government has also been trying to get things moving again with stimulatory policies, including subsidies for purchases of electric cars and another round of infrastructure investment.

But there’s no guarantee that key contributors to the national economy like Shanghai won’t slip back into Covid-related slowdowns in the weeks ahead.

On Monday the local government there said that residents in more than half of the city’s 16 districts needed to be tested for the virus again, despite holding similar tests last week. And it’s hard to see how a fuller recovery is going to happen when Covid-related restrictions are said to be disrupting the lives of nearly 250 million people across more than 40 cities, by some estimates.

“The foundation for sustained economic recovery is not stable,” the National Bureau of Statistics also admitted in comments about the growth data last week, noting that the impact of domestic outbreaks of Covid “hasn’t been eliminated entirely”.

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