There is more bad news from China, this time on the economic front. As economies of many countries have been struggling to recover from pandemic-induced restrictions and the fallout of the Russia-Ukraine war, sluggishness in the world’s second-largest economy is most likely to create further ripples.
The numbers out for the second quarter present a grim scenario. The Chinese economy barely avoided a contraction, posting a growth of 0.4 percent YOY for the second quarter of the current financial year. While exports have picked up, domestic consumption has fallen by 0.8 percent. The country had posted reasonable growth figures ranging between 4-5% in the previous three quarters. What the world optimistically looked forward to as post-pandemic recovery has seen a significant setback with China’s frequent shutdowns – an extension of its Zero-Covid policy.
China is often referred to as the world’s factory. The manufacturing giant is an export-oriented economy with a global market for its goods. Before the Covid pandemic spread from its shores, China accounted for a fifth of the global trade. While countries have learned from the pandemic-induced restrictions and started seeking to reset their skewed trade balance with China, the country continues to remain the production hub of semiconductors, batteries, electronics, pharmaceuticals, and consumer goods.
But, frequent shutdowns of manufacturing and business hubs and international ports have only worsened supply chain delays and bottlenecks. Further, the recent heat wave that hit the country has forced many factories to shut down due to the rising power demand. Overall, Chinese manufacturing units are struggling to return to the production scale and numbers that were the norm before the coal shortage hit and power prices soared.
While the Russo-Ukraine war and high inflation numbers have affected everyone to varying degrees, Chinese government policies have compounded the situation. President Xi Jinping’s efforts to clean up the real estate sector, an essential move according to many, are now casting a long shadow on the growth numbers. The real estate sector, a fourth of China’s GDP, was teetering on gargantuan debt. With no fresh lending from banks, real estate giants have defaulted on debt and abandoned incomplete mega-housing projects. Property sales contracted by 29 percent and construction activities by 45 percent. With homebuyers refusing to make mortgage payments, the prospects for the housing market, once considered the safest investment option, are looking bleak in the near term.
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On the ground, China’s construction industry employs about 5 percent of the population, especially the unskilled labor force. A shakedown in the sector would result in large-scale unemployment. Frequent shutdowns, rising raw materials and power costs, and rolling power cuts have resulted in many small manufacturing units downing shutters for good or hiring less. The agriculture sector employs close to a quarter of the population, and the severe drought could have a negative impact on livelihoods. According to the nation’s statistics agency, the youth unemployment rate stood at nearly 20% in July.
Unlike in other countries, in China, spending has not seen a spurt in recent months. Despite the surprise move by the People’s Bank of China to cut interest rates to boost spending, consumer confidence remains low. The national bank is doing its best to add stimulus without flooding the economy with too much money. As President Xi Jinping focuses on securing his third consecutive term in office, the headwinds of a slowing economy, property crisis, and geopolitical tensions indicate that tough times are ahead.
On the flip side, the slowing down of the world’s biggest energy consumer, some believe, could be good news for the global inflation rates. Falling demand for coal, petroleum, and metals like iron and copper, could help moderate their high prices in the short term. Continued supply chain disruptions would also spur manufacturing in other countries and, in the long term, correct the skewed dependence on Chinese goods.
But, for now, the global economy will have to bear the shudders of China’s near-contraction.
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