Behind ‘Zero Covid’, China’s economy is starting to recover

While China’s consumers are wary of buying big-ticket items like cars or apartments, they’re spending again. Many factories are still operating below capacity, but exports have strengthened. Although construction of new homes is slow, investment in infrastructure and manufacturing is strong.

Despite lingering pockets of economic weakness, China is recovering faster than expected after the government suddenly lifted strict “zero Covid” measures in early December.

The country’s National Statistics Office said on Tuesday that the economy grew by 4.5 percent from January to March compared to the same months of 2022. The growth was largely driven by consumers: Retail sales, a barometer of spending, rose 10.6 percent in March, despite a decline in car sales.

The stakes for the rest of the world are higher after China experienced one of its worst economic performances in decades last year. Over the past two decades, China has been the world’s biggest engine of growth. Despite tensions with the US and growing disagreements with Europe, China remains highly interdependent with its two economies. The International Monetary Fund warned last week that the world faces a growing risk of a painful recession this year as central bankers in the West raise interest rates and banks falter.

Tuesday’s gross domestic product report points to a resurgent China, the world’s second-largest economy.

“Quarterly growth is starting to look like a healthy rebound,” said Louis Lu, an economist specializing in China at Oxford Economics’ Singapore office. “A very modest 4.5 percent year-on-year growth pace at this early stage of the reopening also provides room to provide much-needed support to weaker segments of the economy.”

China has taken steps to promote growth. The government spends money on high-speed rail lines, highways, bridges, and other infrastructure to help increase jobs and consumers. The central bank, the People’s Bank of China, last month told commercial banks they could hold somewhat smaller reserves against potential losses, freeing them to lend.

Growth in the first months of the year was a significant improvement from the 2.9 percent pace in the final quarter of last year, and it was close to the 5 percent target after a flurry of infections spread across the country in December after the lifting of pandemic restrictions. Beijing is set for 2023.

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So far, spending on services like travel and dining has been strong. Big hotels in Beijing and Shanghai turned off elevators last year and often have a 200-seat restaurant, now with people waiting in line for a table at breakfast. Much of that activity is driven by Chinese consumers as domestic flights are slow to resume.

At the same time, China faces a widening gap in government budgets as revenues lag and costs rise. And a slow housing crash is a significant drag on the economy. Construction of new homes, offices and shops fell 5.8 percent in the first quarter compared to the same period last year.

The local economy in Suzhou, a city on the Yangtze River near Shanghai, shows many national trends. Consumers and companies are spending again. But there are considerable differences from neighborhood to neighborhood and even from business to business.

At a street market in Suzhou, Jiang Yongming, a butcher, stood behind a table covered with slabs of raw pork and complained about the lingering austerity of his neighborhood’s residents. Meat buyers are told to cut a large file into two or three pieces and buy only one of them, he said.

Liu Zhongyou, a catfish and clams seller, has a different experience at a street market in Suzhou. He lost all his sales for a month last year when nearby restaurants closed due to pandemic restrictions, but now the same restaurants have started placing larger orders.

“During the pandemic we were losing money – we had no customers,” Mr. Liu said. “It’s better now.”

The contrasting experiences of two small businesses in the same market indicate China’s recovery — strong but uneven.

Retail sales in China rose only 3.5 percent in January and February compared to the same months last year. So the big increase in March was the first sign of a strong recovery. But this improvement pales in comparison to the real decline that led to the start of Shanghai’s two-month lockdown in March 2022, when Covid cases were on the rise.

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And some sectors never recovered from the epidemic. Cinemas were particularly hard hit: a third of them went down. Box office revenue fell 55 percent last month compared with the same month four years ago, according to Maoyan Entertainment, an online ticketing company that tracks the broader industry in Beijing.

Although China’s economy is beginning to rebound, there is little sign of inflation. Unlike the West, China avoided sending pandemic checks and coupons to households. Hence, the ability to bid up the price of goods is limited. Consumer prices were only 0.7 percent higher in March compared to last year, and the price manufacturers charge their customers for industrial goods actually fell.

“Domestic demand is insufficient, and the foundation for economic recovery is not yet solid,” said Fu Linghui, an official at the Bureau of Statistics.

Incomes for millions of Chinese have been severely depressed and weakened during the pandemic. Unemployment among 16- to 24-year-olds rose to 19.6 percent in March from 18.1 percent in February, as many recent college graduates struggle to find white-collar jobs and are wary of working in factories. In a positive sign, unemployment among residents aged 25 to 59 fell to 4.3 percent in March from 4.8 percent in February.

A tabletop electric motors repair shop sits next to one of Chukwue’s iconic canals lined with weeping willows. The shop has long supplied many small workshops producing nails and screws for the city’s largest industry.

The shop owner, Guo, who gave his family name, said some workshops failed during the pandemic, but survivors are back in business. “It’s basically a lot better than it was before, and what wasn’t closed has basically recovered,” Mr. Guo said.

Industrial production — output from factories, mines and power plants — rose 3.9 percent in March from a year earlier, up from 2.4 percent in January and February. But industrial growth in March was still anemic by China’s standards. A sharp slowdown in the car industry is one of the main culprits.

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Car sales fell 13.4 percent in the first quarter. At the end of December, China allowed national subsidies for electric cars to expire and reinstated a sales tax on gasoline-powered cars that had been suspended during the country’s “zero Covid” measures.

Overall, exports are recovering, rising 14.8 percent in March from a year earlier. Factories catch backlog of orders accumulated during “Zero Covid” lockdowns.

Investment in new apartment buildings, roads, factories and so-called fixed assets has long been a key part of the Chinese economy. Overall fixed asset investment is growing, including a 5.1 percent increase in the first quarter compared to the same period last year. But investment has not followed the pattern welcomed by Beijing.

Government spending on new railways, roads and other infrastructure rose by 8.8 per cent in the first quarter compared to the same months last year, the Office for National Statistics said. Manufacturing investment increased by 7 percent.

But due to a cash crunch and dozens of foreign bond defaults over the past two years, residential real estate developers are launching very few new housing projects, even as home prices begin to stabilize.

They are focusing on completing the apartment buildings they have already started, many of which are getting delayed. Stock market investors are wary of the sector, with one major developer, Sunac China Holdings, seeing its share price plunge 59 percent last week as it resumed trading after a year-long hiatus.

Even those taking delivery of new flats from developers are reluctant to spend money on things like painting and furnishing. Mr. At a paint shop down the street from Guo’s electrical repair shop, customers have disappeared.

“We don’t have any business now,” said the shop owner, who gave his last name, Lu. “Nobody’s coming.”

Li Yu Research contributed.

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