On Friday, the National Bureau of Statistics will quantify the “small” price Xi insists is worth paying for the pursuit of “zero Covid” when it releases its estimate of second-quarter economic growth. Here are five things to look for in Friday’s release.
How big was the impact of regional restrictions in the second quarter?
The world’s second-largest economy grew by 4.8 percent in the first quarter of 2022, below the government’s full-year growth target of 5.5 percent. The first-quarter NBS data recorded lockdowns in the central city of Xi’an and Jilin province, a major agricultural and industrial hub, but not the two-month lockdown in Shanghai that went into full effect in April. The second-quarter estimate will also reflect very limited economic activity in recent months in Beijing, which did not implement an extensive city-wide lockdown like in Shanghai but brought large parts of the capital to a standstill for weeks. As a result, economic expansion is likely to be the slowest since the first quarter of 2020, when a de facto national lockdown in response to the initial outbreak in Wuhan led to an unprecedented contraction of 6.8%.
Will officials admit that their full-year GDP growth target of 5.5% is out of reach?
Many agencies and investment banks have already said as much as they downgraded their full-year forecasts for Chinese economic growth. In June, the World Bank officially revised its estimate of China’s full-year economic growth to 4.3 percent, down from 5.1 percent in December. “This revision largely reflects the economic damage caused by the Omicron outbreaks and prolonged lockdowns in parts of China from March to May,” the World Bank said. He also predicted “aggressive stimulus policy to moderate the economic downturn” in the second half of the year. Global investment banks are equally pessimistic. Economists at Goldman Sachs, Citi, JPMorgan and Morgan Stanley have all cut their estimates for growth in 2022 to between 4 percent and 4.3 percent in recent months. Goldman cited “second-quarter Covid-related damage to the economy” for its revised forecast.
Is a wave of stimulus building up?
A frequent criticism of the Chinese government’s annual growth targets – including, in private quarters, by reform-minded officials – is that they account for “artificial” growth driven by local governments for the sheer purpose of meeting the target. Such growth for growth’s sake is often fueled by debt and waste, a habit that Xi and his economic advisers, led by Vice Premier Liu He, have vowed to end. But it’s hard to cut when local governments across the country need economic growth to create jobs and finance their operations, regardless of the long-term debt they incur. This reflex has already begun. Local governments across China will be allowed to issue an additional 1.5 trillion Rmb ($223 billion) worth of bonds this year to boost burgeoning growth, according to people familiar with the policy discussions in Beijing. The Chinese government set this year’s bond quota, used mainly by local governments for infrastructure projects, at Rmb3.65tn, of which Rmb1.5tn was carried over to late 2021. In March, the State Council, China’s cabinet, said the remaining 2.2 trillion Rmb in 2022 bonds should be issued by the end of September. The additional Rmb1.5tn will be carried over from next year’s quota.
Is the tide finally turning for the real estate sector?
Recently released credit data also suggests that the race to achieve 5.5 percent growth is on. New credit came in at Rmb5.2tn, well above expectations and nearly 11 percent higher than in May. The increase was partly due to cuts in the benchmark interest rate used to price mortgages and Rmb848bn in household loans, according to the June 2021 figure, when China’s escape from Covid looked more certain. Home sales in June fell 9.5 percent year-on-year, compared with a drop of more than 48 percent in May. Larry Hu, chief China economist at Macquarie, said the “darkest moment for the property sector”, China’s biggest economic engine, may finally be over.
Will more lockdowns ruin hopes of a second-half rebound?
Xi’s trip to Wuhan sent an important message, reiterating the sanctity of zero Covid. The city was the site of the Chinese Communist Party’s first victorious battle against the pandemic and the country’s first major lockdown. Similar victories have since been claimed in Shanghai and many other cities that have successfully implemented strict lockdowns to quell local outbreaks. Xi visited Wuhan at a time when life appeared to have fully returned to normal in Shanghai, Beijing and many other cities hit by the lockdown. But the virus often responds to these claims of success with another variant that is more contagious but no more deadly, raising questions about the wisdom and viability of zero-Covid. Shanghai residents are already bracing for another possible lockdown this week as the BA.5 variant spreads across China. Additional reporting by Cheng Leng in Hong Kong and Sun Yu in Beijing
