China narrowly misses contraction in Q2 as zero Covid wreaks havoc on economy

China narrowly misses contraction in Q2 as zero Covid wreaks havoc on economy

China’s economy narrowly avoided contracting in the second quarter as the fallout from President Xi Jinping’s zero-sum policy fueled expectations that Beijing would inject hundreds of billions of dollars in stimulus to boost growth.

The world’s second-largest economy grew by 0.4 percent year-on-year in the three months to the end of June, below the 1.2 percent forecast by economists, and down from Recorded 4.8 percent in the first quarter.

The slowdown reflected the blow from a two-month shutdown in Shanghai, which took full effect in April, and illustrated the threat to global growth from Xi’s bid to stamp out Covid-19 in the world’s main manufacturing hub.

The National Bureau of Statistics data comes at a tense time for Xi’s economic planners. Beijing’s fight to stamp out the coronavirus outbreak has relied on months of swift lockdowns and harsh restrictions on mobility, stalling the pace Chinese economic recovery.

Weak growth in the second quarter will make it harder for the economy to meet Beijing’s target of 5.5 percent annual growth in 2022, a three-decade low.

Adding further pressure to the Xi administration, youth unemployment has risen to a record 19.3 percent.

According to an analysis released this week by Japanese investment bank Nomura, 31 Chinese cities are under full or partial lockdown, affecting 247.5 million people in regions that account for about 17.5 percent of the country’s economic activity.

The Xi administration has consistently said it will prioritize protecting the country from mass outbreaks of the coronavirus over the economy. He blames the pandemic and the risk of stagflation in the global economy for the country’s slowdown.

“Generally speaking, with a series of solid economic stabilization policies achieving notable results, the national economy has overcome the negative impact of unexpected factors, showing the momentum of stable recovery,” Fu Linghui, a spokesman for the NBS, told a briefing in Beijing on Friday.

On a quarterly basis, China’s gross domestic product fell 2.6 percent, compared with a revised 1.4 percent growth in the first three months of the year and below expectations for a 1.5 percent contraction, according to a Reuters poll.

Retail sales, a critical gauge of sentiment in the world’s largest consumer market, fell 4.6 percent in the second quarter after a double-digit decline in April. Consumer spending has lagged behind the broader recovery since the start of the pandemic, partly due to travel restrictions.

In June, industrial production increased by 3.9 percent compared to the same period a year earlier. Factory production increased by 0.7 percent in the second quarter.

Fixed asset investment, China’s main measure of capital spending, rose 5.6 percent last month. Infrastructure investment was up 7.1 percent as Beijing stepped up its stimulus efforts, while real estate investment fell 5.4 percent.

China’s deeper economic slowdown could prompt looser monetary policy and fiscal stimulus, analysts say, unlike developed economies that are raising interest rates to combat high inflation.

But the new round of credit investment risks undermining attempts to tackle high leverage and bad debt in the real estate sector, which has raised concerns about financial stability. The People’s Bank of China has been reluctant to cut interest rates for fear of capital outflows.

Despite criticism that the central government is returning to debt and wasteful spending – much of it focused on large-scale infrastructure and financed through local governments – Beijing is increasingly desperate to stem the economic slowdown and rising unemployment.

The Financial Times published this week that local governments across China will be allowed to issue an additional 1.5 trillion Rmb ($223 billion) in bonds this year to boost weaker growth. The consumption would be transferred from the quota for the following year.

Additional reporting by Tom Mitchell in Singapore and Jennifer Creery and Andy Lin in Hong Kong

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