Beijing faces major test to keep the economy firing as challenges bearing down on growth proliferate
By guest author Jason Douglas from the Wall Street Journal. Bingyan Wang and Grace Zhu contributed to this article.
China’s economy accelerated in the first quarter of the year, even as lockdowns closed factories and kept tens of millions confined to their homes in March, according to official data that economists say overstates the strength of the world’s second-largest economy.
China’s gross domestic product expanded by an annual 4.8% in the first quarter, China’s National Bureau of Statistics said Monday, a faster pace than the 4% expansion recorded in the final three months of 2021 and the 4.6% expansion predicted by economists polled by The Wall Street Journal.
Officials in Beijing face a major test this year to keep the economy firing as the challenges bearing down on growth proliferate. China’s zero-tolerance approach to Covid-19 is battering consumer spending and hurting industrial production in an economy grappling with a real-estate crunch and a regulatory crackdown on industries including technology and education.
Russia’s invasion of Ukraine, and Western sanctions in response, have sent commodity prices skyrocketing, pushing up costs for businesses and disrupting global supply chains in wheat, oil, metals and other goods. Galloping inflation is pinching consumers in the U.S. and Europe, eating into overseas demand for China’s manufactured goods.
The upshot is many economists are skeptical that China can meet the government’s goal of increasing GDP by around 5.5% in 2022, darkening the outlook for a global economy racked by war, inflation and the expected rapid withdrawal of easy-money policies that have been a mainstay of growth in the U.S. and other advanced economies for years.
“The growth target is impossible at this point,” said Logan Wright, director of China markets research at Rhodium Group in Hong Kong.
Most of the first quarter’s growth was squeezed into January and February. In March, lockdowns to contain Covid-19 outbreaks had spread to major industrial centers including Shenzhen, Shanghai and the northeastern industrial province of Jilin. Most of those lockdowns remain in place, raising questions about the second quarter.
Data show factory output weakened last month as restrictions thinned workforces and snarled up supply chains. Industrial production rose 5% in March compared with a year earlier, slowing from the 7.5% year-on-year increase in the January-February period. Recent trade data show Chinese imports falling in March for the first time in almost two years as export growth slowed.
Retail sales fell 3.5% in March from a year earlier, down from a 6.7 % year-on-year increase in the first two months of the year, as lockdowns kept people indoors and shut stores. That was a bigger drop than the 2% decline economists polled by the Journal were anticipating.
Home sales by volume plunged 25.6 % in the first quarter compared with a year earlier, while new construction starts measured by floor area dropped by 17.5 %. Both of those declines were sharper than in the first two months of the year.
Chinese officials said GDP expanded 1.3 % in the first three months of the year when compared with the fourth quarter of 2021, slowing from the 1.6 % quarter-on-quarter increase in the previous quarter.
“The complexity and uncertainty of the environment at home and abroad has increased, and economic development is facing more difficulties and challenges,” Fu Linghui, a spokesman for the National Bureau of Statistics, said Monday.
Firms such as Tesla Inc. and Volkswagen AG closed plants in China for spells during March as lockdowns hampered production. Others, such as Chinese auto maker SAIC Motor Corp. and chip maker Taiwan Semiconductor Manufacturing Co. , kept some operations going by persuading workers to sleep within the factory compound.
The pressure is especially acute in Shanghai, the center of the current Covid-19 outbreak. “If production couldn’t be resumed in Shanghai, all technology and industrial sectors with supply-chain links to Shanghai—especially the auto industry—will be completely shut down after May, causing a huge economic price,” Richard Yu, head of Huawei Technologies Co.’s automotive solution sector, said Friday on social-media platform WeChat.
China’s Ministry of Industry and Information Technology vowed to help key companies in Shanghai resume work by clearing logistical obstacles and ensuring supplies of key raw materials. It has made a priority list of 666 companies in key industries such as automotive, semiconductor and biomedicine to ensure they can restart, it said in a statement posted on its website Friday. Tesla is aiming to restart production this week, the Journal reported.
Restrictions in Shanghai, a city of 25 million people, have started to ease somewhat after caseloads ebbed, though the city remains under tight control. In Jilin, authorities have declared victory after an extended lockdown. But public-health measures are beginning to tighten elsewhere, highlighting the difficulty of containing the fast-spreading Omicron variant of the virus and the risk of sporadic lockdowns damping economic activity throughout the year.
Localised lockdowns are being newly imposed, expanded or extended elsewhere in the country, including the northern industrial city of Taiyuan, the southern megacity of Guangzhou and again in Shenzhen. Forty-five Chinese cities with a combined 373 million people had implemented either full or partial lockdowns as of Monday, a sharp increase from 23 cities and 193 million people a week earlier, according to a survey by Nomura. The 45 cities account for more than one-quarter of China’s population and roughly 40% of the country’s total economic output.
China’s headline measure of joblessness, the surveyed urban unemployment rate, jumped to 5.8% in March, officials said Monday, the highest reading in almost two years and the largest one-month increase since early 2020, when China was grappling with the initial outbreak of Covid-19 in Wuhan.
Economists expect Beijing to enact more stimulus measures in the coming months in an effort to hit the 5.5% GDP target. China’s central bank said Friday it would release billions of dollars worth of liquidity to encourage bank lending, though it kept benchmark interest rates unchanged, while a meeting of top officials chaired by Premier Li Keqiang this week teed up plans to bail out industries hit hard by the pandemic such as retail and hospitality and accelerate big construction projects, according to state media.
For many economists, it still isn’t clear where growth is supposed to come from. Businesses face rising prices and weakening domestic and overseas demand, limiting their appetite for investment. Real estate has been a reliable engine of growth in the past but a yearslong boom has left the sector struggling and riddled with bad debt. And consumers are boxed in by the government’s zero-tolerance strategy toward Covid-19.
“You can’t arrest a slowdown in growth if you stop people from going outside,” said Frederic Neumann, co-head of Asia economics research at HSBC in Hong Kong.