China’s economy stumbled last year with covid shutdowns that hampered growth

The Chinese economy had one of its worst performances in decades last year as growth was dragged down by a series of Covid shutdowns followed by a deadly outbreak in December that swept across the country with remarkable speed.

China grew 3 percent for the year, figures released Tuesday show, less than half of what it was in 2021 and far below Beijing’s target of 5.5 percent. Apart from 2020, it was the most disappointing since 1976, the year after Mao Zedong’s death when the economy fell 1.6 percent.

On December 7th, China lifted without warning its strict “zero Covid”[ads1]; restrictions after almost three years. Within weeks, the virus had infected hundreds of millions of people, strained hospital wards and funeral homes, and left factories, offices and restaurants without workers and customers.

The political reversal by Xi Jinping, China’s top leader, while crippling the economy in December, has raised hopes that it will regain its footing later this year. Whether it does is of great importance to the rest of the world. China’s consumers are an almost irreplaceable source of revenue for domestic and foreign companies. The factories produce a larger share of the world’s production than the United States, Germany and Japan combined. The Chinese Communist Party has depended on growth for political legitimacy.

Despite the blow inflicted by “zero Covid”, China appears to have grown faster last year than major rivals such as the US, Japan and Germany, all of which are estimated by economists to have grown less than 2 percent last year.

In the decade before the pandemic, China’s economy was one of the world’s most dynamic, with average growth of 7.7 percent a year. But in the last three months of 2022, growth sputtered to 2.9 percent, a decline from the previous quarter.

Chinese officials insist the economy will rebound after infections peak. Traffic jams have reappeared and subway trains are increasingly full in Beijing and Shanghai. Shops along Shanghai’s famous Nanjing Road, the Fifth Avenue of China, are no longer empty. The domestic terminals at major Chinese airports are crowded with travelers. The optimism is reflected in China’s stock markets, which have risen in recent weeks.

But the way forward is deeply uncertain. Large parts of China’s population, especially the elderly, are not fully vaccinated, which increases the risk of new Covid variants. The economy’s real estate sector, usually a key driver of wealth, is weighed down by huge corporate debt.

Many economists are already writing off January and probably February as well. A large number of workers have already traveled to their hometowns to celebrate the Lunar New Year celebrations, in many cases for the first time in three years. No one knows when they will return to the cities to work.

“March activity data and confidence may start to surprise on the upside,” said Louise Loo, economist at Oxford Economics’ Singapore office.

The economic scars of “zero Covid” are visible in Yiwu, a once-bustling riverside city of light industry and wholesale markets in southeastern China. In interviews there this month, nearly a dozen residents said that while December’s wave of cases appears to be subsiding, the damage remains.

Yiwu underwent a harsh, 10-day lockdown in August to stem a 500-case virus outbreak, only to suffer a wave of cases in mid-December when “zero Covid” measures were lifted.

Today, the eateries are only a third full and many have closed permanently. Many shops were almost empty when they should have been busy with people buying gifts ahead of the Lunar New Year celebrations which were due to start this weekend.

Yuan Hao, the owner of a flower shop no bigger than a walk-in closet, said that in some of the storefronts near him, several businesses opened and then quickly closed in the past year. Merchants found that almost no one spent money. And now almost no one buys flowers for the Lunar New Year, he said.

“All the money we make is spent and there is no way to save more money,” he said.

Jin Weiying runs a shop wholesale business selling Lunar New Year decorations and accessories. But his customers – dealers from all over China – are ordering fewer supplies than usual and demanding deep discounts.

“In the good old days, it was normal to have customers order eight or ten boxes per appointment, but now they only order two or three sets,” Mr. Jin said. “Even if it’s back to normal, ordinary people have no money in their hands.”

The shop owners’ experiences are confirmed by the national data.

Prices across the country for pork, a highlight of Lunar New Year banquets, are lower than usual for this time of year, said Darin Friedrichs, market research director at Sitonia Consulting, an agricultural commodities firm in Shanghai.

Retail sales in China fell 1.8 percent in December compared to the same month in 2021, the National Bureau of Statistics also reported Tuesday. To revive consumer spending, China must repair their confidence – a difficult task. The government’s consumer confidence index fell last month to its lowest level in more than three decades.

Households saved money during lockdowns that forced them to stay at home, data from China’s central bank shows. But much of the increase is in fixed deposit accounts, locked in for longer periods. Also, a central bank survey of urban depositors last month found that a record number of Chinese are planning to increase their savings, a trend that could dampen spending at least in the short term.

Another difficulty for policymakers in Beijing is that foreign demand has fallen. Higher interest rates imposed by the US Federal Reserve and other central banks have dampened their economies and reduced their appetite for imports from China.

Chinese officials announced Friday that exports fell 9.9 percent in December compared with the same month a year earlier, including nose dives of 19.5 percent to the United States and 17.5 percent to countries in the European Union.

In Yiwu, thousands of foreign buyers used to visit the block-long export wholesale market. But most were unable to visit after China closed its borders in March 2020, just months into the pandemic. Many have looked for suppliers elsewhere.

One of the companies with sales offices in the Yiwu export market is Tian Cheng Glass, which produces jugs and cups, mainly for customers in the Middle East. Tian Cheng had about $10 million a year in sales before the pandemic, said Zheng Xiaohong, the company’s retail manager. Now they are less than half.

“It was much better in 2019 and you would meet random foreigners then,” she said, standing in a deserted stall at the export market, surrounded by glass-covered shelves. – Then they didn’t come here.

While many local governments have fallen deeply into debt, new connections between neighborhoods and cities could make China even more competitive. Yiwu, for example, has opened its first two light rail lines in the past six months.

The national government has also started bailing out China’s real estate sector with lines of credit from state-owned banks. Construction has finished on some of the country’s many apartment complexes where work had stalled, such as a sprawling complex in Dongguan, a city near Hong Kong, built by Evergrande, a near-insolvent property developer.

The speed with which Covid raced through the country in the last month has been a public health disaster for China. Some analysts believe that high infection rates, barring multiple outbreaks, could help propel the economy forward by making the population more resistant to becoming seriously ill.

Wang Xiongfeng, a 46-year-old Yiwu resident, said he and many other people he knew in Yiwu fell ill in mid-December. But they had largely recovered and resumed living their lives more as they did before the pandemic.

Wang said he expected more foreign buyers to come to Yiwu soon to place orders for exports and for the city’s economy to begin to revive. “Things will get better,” he predicted.

Li you contributed research.

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