February 7, 2023

The Chinese economy faltered last year as growth stalled due to the coronavirus

China’s economy experienced its worst performance in decades last year, as growth slowed due to several Covid-19 lockdowns, followed by a deadly outbreak in December that swept across the country with remarkable speed.

Figures released on Tuesday showed China grew 3 percent over the year, less than half the level in 2021 and well below Beijing’s target of 5.5 percent. Other than 2020, it was the most disappointing showing since 1976, the year Mao Zedong died, when the economy fell 1.6 percent.

On December 7, China Raised without warning Its strict restrictions are “zero Covid” after nearly three years. Within weeks, the virus infected hundreds of millions of people, straining hospital wards and funeral homes, and leaving factories, offices and restaurants bereft of workers and customers.

A policy reversal by Xi Jinping, China’s supreme leader, paralyzed the economy in December and raised hope that it would regain ground later this year. Whether that is of great importance to the rest of the world. Consumers in China are an almost indispensable source of income for both domestic and foreign companies. Its factories produce a larger share of the world’s industrial production than the United States, Germany, and Japan combined. The Chinese Communist Party relied on growth for political legitimacy.

Despite the blow inflicted by “zero Covid”, China appears to have grown faster last year than major competitors such as the United States, Japan and Germany, which economists estimate expanded less than 2 percent last year.

In the decade before the pandemic, China’s economy was one of the most dynamic in the world, growing at an average rate of 7.7 percent annually. But in the last three months of 2022, growth slowed to 2.9 percent, and it fell from previous quarter.

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

But the road ahead is very vague. Large parts of China’s population, especially the elderly, are not fully vaccinated, which leads to an increased risk of contracting new Covid variants. The real estate sector of the economy, normally a major driver of wealth, is weighed down by massive corporate debt.

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

“Activity and confidence data for March may start to surprise to the upside,” said Louise Law, an economist at Oxford Economics in Singapore.

The economic scars of “Zero Covid” are visible in Yiwu, a river town once bustling with light industry and wholesale markets in southeast China. In interviews there this month, nearly a dozen residents said that even as the tide of cases subsided in December, the damage was still there.

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

Today, restaurants are only a third full and many have closed permanently. Many shops were nearly empty when they should have been bustling with people shopping for gifts ahead of the Lunar New Year celebrations that are set to begin this weekend.

Yuan Hao, the owner of a flower shop no bigger than a large wardrobe, said that in some storefronts near him, many shops opened and then closed quickly in the past year. Traders found that almost no one ever spent money. He said that now almost no one buys flowers for the Lunar New Year.

“All the money we earned has been spent and there is no way we can save more money,” he said.

Jin Weiying runs a wholesale store in the storefront that sells Lunar New Year decorations and accessories. But his customers – retailers from all over China – are ordering smaller supplies than usual and demanding deep discounts.

“In the old days, it was normal for customers to order eight or ten boxes per deal, but now they only order two or three sets,” said Mr. Jin. “Even if it returns to normal, the general public has no money in their hands.”

National data confirms the experiences of shopkeepers.

Across the country, pork prices, a highlight of Lunar New Year banquets, are lower than usual for this time of year, said Darren Friedrich, director of market research at Cetonia Consulting, an agricultural commodities company in Shanghai.

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

Data from China’s central bank showed that families saved money during lockdowns that forced them to stay at home. But much of the increase lies in fixed deposit accounts, which are closed for longer periods of time. Moreover, a central bank survey of urban depositors last month found record numbers of China’s plan to increase their savings, a trend that could dampen consumption at least in the near term.

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

Chinese officials announced on Friday that exports fell 9.9 percent in December from the same month a year ago, including nose dives, down 19.5 percent to the United States and 17.5 percent to European Union countries.

In Yiwu, thousands of foreign buyers used to visit the wholesale market for export in bulk. But most of them were unable to visit after China closed its borders in March 2020, a few months after the outbreak of the epidemic. Many have looked for suppliers elsewhere.

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

“It was much better in 2019, and you would have met random foreigners then,” she said, standing in an abandoned stall in the export market, surrounded by shelves covered in glassware. “Then they didn’t come here.”

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

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

The speed with which Covid has raced across the country in the past month has been a public health disaster for China. Some analysts believe higher infection rates, barring more outbreaks, could help move the economy forward by leaving the general population more resilient to serious disease.

Wang Xiongfeng, 46, a resident of Yiwu, said he and several other people he knew in Yiwu fell ill in mid-December. But they have mostly recovered and resumed living more than they did before the pandemic.

Mr. Wang said he expects more foreign buyers to come to Yiwu to place orders for export soon, and for the city’s economy to begin to recover. He predicted that “things will get better.”

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