China’s economy faltered ahead of major Covid policy shift, retail sales and unemployment data show

China’s economy faltered ahead of major Covid policy shift, retail sales and unemployment data show

China’s economy faltered ahead of major Covid policy shift, retail sales and unemployment data show

Hong Kong

The end of pandemic restrictions in China will eventually usher in a sharp economic rebound as the country learns to live with the Covid virus, according to economists, even as a batch of data showed a slump in economic activity in November.

Retail sales fell 5.9% last month from a year ago, according to the National Bureau of Statistics. It was the worst retail spending contraction since May, when widespread Covid lockdowns have hit the economy.

Industrial production rose just 2.2% in November, less than half of October’s growth. Investment in real estate, which accounts for up to 30% of China’s GDP, has plummeted 9.8% in the first 11 months of the year. Property sales by value plummeted more than 26%.

Unemployment has worsened, rising to 5.7% last month, the highest level in six months.

November’s economic crisis came before Beijing lifted its crackdown on pandemic restrictions earlier this month. Top leaders signaled at a key policy meeting last week that they will refocus on growth and look for an economic turnaround next year.

“November data should be the last batch damaged by zero-Covid,” wrote Wei Yao and Michelle Lam, economists at Societe Generale, in a research note.

But it could be the second quarter of 2023 before the anticipated end of the Covid brakes triggers a robust recovery. There is still a risk of supply chain disruptions and reduced demand as Covid outbreaks spread to a population with limited immunity, they said.

This still from AFPTV footage shows a nearly deserted street in Beijing's Wangfujing shopping district on December 13, 2022.

Economists generally expect growth to fall to between 2.8% and 3.2% this year, one of the lowest levels since 1976, when the death of former leader Mao Zedong ended a decade of social turmoil and cheap.

On Wednesday, two of the country’s top governing bodies, the Central Committee of the Communist Party and the State Council, issued a strategic plan to expand domestic demand and stimulate consumption and investment until 2035.

Many investment banks have since become more optimistic about China’s prospects. Goldman Sachs updated its 2023 growth estimate to 5.2% from 4.5% on Thursday, saying it expects consumption and services eventually to kick in. General Society revised its 2023 growth estimate upward to 5.3%, while Morgan Stanley updated its forecast to 5.4%.

All cited the faster pace of reopening and continued stimulus measures from Beijing. The economic downturn in November was a major reason Beijing reversed course, they said.

“The collapse of the economy is likely to be a factor behind the political pivot in both a Covid-zero and a property scenario,” said Larry Hu, chief China economist at the Macquarie Group. In mid-November, Beijing launched sweeping measures to rescue the country’s ailing real estate sector.

“Then it turns out that the Covid-zero exit has been much faster than expected,” Hu said, adding that it would pave the way for a strong economic recovery next year.

Three years of lockdowns, mass testing and quarantines have fueled public anger and imposed huge debts on local governments across the country.

The abrupt easing of Covid restrictions this month has caused infections to spread rapidly, throwing the economy into chaos. Fears of contracting the virus have kept people off the streets, disrupting workplaces and businesses.

Empty restaurants and shops are commonplace, while factories struggle to secure enough labor and raw material supplies. For many analysts, these are short-term issues that China must endure before it finally learns to live with Covid.

“We believe that incoming migration during the Chinese New Year holiday in late January could result in an unprecedented spread of Covid and severe disruption to the economy,” according to Nomura analysts. “We continue to warn that the road to full reopening may still be painful and bumpy.”

The country is grappling with other challenges.

A crisis has engulfed China’s huge property market since last year, when some high-profile developers defaulted on their debt due to a liquidity crunch initially triggered by a regulatory crackdown on excessive lending. The problem intensified this summer as angry homebuyers refused to pay mortgage payments on unfinished homes, rattling financial markets and sparking fears of contagion.

Since then, authorities have urged banks to increase loan support for developers so they can complete projects. They also cut interest rates to restore confidence among buyers.

But as the housing crisis persisted, buyers balked at the weak economy and severe Covid curbs.

In November, sales of the top 100 real estate developers were down 34.4% from a year ago, according to a private survey by the China Index Academy, a leading real estate research firm. Their sales are down 42% so far this year.

“The contraction in properties deepened further in November,” Nomura analysts said. Property investment growth collapsed to an all-time low in November, they said.

Worsening US-China relations were also seen as a key risk to the Chinese economy.

In October, the Biden administration unveiled a sweeping set of export controls that prohibit Chinese firms from purchasing advanced chips and chip-making equipment without a license. The rules also limit the ability of US citizens or green card holders to support the “development or production” of chips in certain manufacturing facilities in China.

“It is possible that more restrictive measures will come from the West to contain the Chinese manufacturing sector, triggering further decoupling,” Natixis analysts say, adding that these restrictive measures it would also hamper China’s long-term potential growth.

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