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China’s economic activity plummets as Covid shutdowns hit growth

China’s economic activity fell sharply in April when a wave of shutdowns across the country posed the biggest challenge to growth prospects since Covid-19 emerged more than two years ago.

Retail sales, the country’s most important measure of consumer activity that had already declined in March, fell 11.1 percent year-on-year, compared with forecasts of a 6.6 percent drop from economists asked by Bloomberg.

Industrial production, which underpinned China’s rapid economic recovery following the first Covid shock in early 2020 and which was expected to rise slightly despite recent restrictions, fell 2.9 per cent.

The data is the most striking sign of the growing economic strain from China̵[ads1]7;s approach to the coronavirus, which the country has tried to stop through urban closures, mass testing and quarantine centers. Elimination of infections is a priority for President Xi Jinping ahead of his bid for a third term in power this year.

The zero-Covid strategy had largely contained the virus for the past two years, but the authorities have escalated the implementation of the strategy dramatically in 2022 after an outbreak of the highly contagious Omicron variant, mainly centered around Shanghai, which was locked down in late March.

Dozens of cities and hundreds of millions of people across China have been put under complete or partial blockade as part of a policy that is expected to have profound consequences for global supply chains.

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China’s economy was already under pressure from a liquidity crisis across its highly leveraged real estate developers and a broader decline in real estate when home sales collapsed.

Over the weekend, the government effectively cut the basic interest rates on mortgages for new lenders to first-time buyers from 4.6 per cent to 4.4 per cent, the latest in a series of relief measures to support one of the country’s most important economic drivers.

“The government is facing increasing pressure to launch a new stimulus to stabilize the economy,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management, adding that mortgage rates were “one step in that direction.”

But “the effectiveness of this policy depends on how the government will” fine-tune “the zero-tolerance policy against the Omicron crisis, he said.

Asian markets reversed early on Monday to trade lower after the data release. China’s CSI 300 of Shanghai- and Shenzhen-listed stocks opened 0.7 higher, but fell 0.8 percent after the data release, while Hong Kong’s Hang Seng index rose 1.1 percent before falling 0.4 percent.

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Last week, authorities said residents would not be able to leave the country for “non-essential” reasons and imposed stricter measures in Shanghai almost seven weeks after a city-wide blockade was imposed. A city official said on Monday that the authorities aimed to reopen Shanghai largely from June 1.

China’s gross domestic product rose 4.8 percent year-on-year in the first quarter. The government aims for a growth of 5.5 percent for the year, the lowest official target in three decades. Economists have already cut growth forecasts for the second quarter.

Analysts at the Australian bank ANZ maintained a growth target of 5 percent for 2022 on the basis that stimuli will “offset the loss of economic activity over the past two months”. But they were “pessimistic about China’s medium-term outlook” given expectations that support measures would be phased out next year.

“The consequences of Shanghai’s closure are far-reaching,” they wrote. “Economic and technological connection with the rest of the world is in jeopardy.”

The surveyed unemployment was 6.1 per cent in April, the highest level since February 2020.

Additional reporting by Jennifer Creery in Hong Kong

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