BEIJING, September 27 — China’s economy is on course for its slowest growth since 1991, as official data and private forecasts point to a sharp slowdown driven by a property crisis, strict COVID-19 lockdowns and weakening global demand. In the second quarter of 2022, China’s gross domestic product grew by just 0.4% year-on-year, the weakest pace since the first quarter of 2020, when the initial COVID-19 outbreak brought activity to a halt.
The figure fell far short of economists’ expectations of around 1% and marked a sharp deceleration from the 4.8% growth recorded in the first quarter of 2022. For the first half of 2022, GDP expanded by 2.5% compared with the same period a year earlier, well below the government’s annual target of around 5.5% set in March 2022.
Property crisis and consumer weakness
The slowdown is broad-based. The property sector, which accounts for roughly 25-30% of GDP when related industries are included, has been in crisis since 2020, when Beijing introduced the ‘three red lines’ policy to curb excessive borrowing by developers. In 2021, China Evergrande Group, then the country’s most indebted developer with over $300 billion in liabilities, defaulted on its offshore bonds, triggering a sector-wide liquidity crunch.
In 2022, dozens of developers have missed payments, and nationwide mortgage payment strikes by homebuyers have added to the turmoil. Retail sales, a key gauge of consumer spending, rose just 0.7% year-on-year in the first half of 2022, and fell 4.6% in April 2022 alone, as lockdowns shuttered businesses and kept consumers at home.
Fixed-asset investment grew 6.1% in the first half, but infrastructure spending by state-owned enterprises propped up the figure, while private investment lagged. Youth unemployment reached a record high of 19.9% in July 2022, according to the National Bureau of Statistics, and overall urban unemployment stood at 5.4% in June 2022. Exports, a traditional engine of growth, slowed in the second quarter as global demand weakened and supply-chain disruptions persisted.
In July 2022, exports rose 18% in dollar terms from a year earlier, but that was down from 22% growth in June.
Policy response and global spillover
The Chinese government has responded with a mix of measures. The People’s Bank of China cut key interest rates in August 2022, and the State Council announced a 19-point package in May 2022 to support the economy, including tax rebates and infrastructure spending. However, economists warn that Beijing’s strict ‘zero-COVID’ policy, which has led to full or partial lockdowns in major cities including Shanghai from late March to June 2022 and Chengdu in September 2022, continues to weigh on activity.
The International Monetary Fund in July 2022 slashed its forecast for China’s 2022 growth to 3.3%, down from 4.4% in April, citing lockdowns and the property downturn. If realized, that would be the weakest performance since 1991, excluding 2020’s 2.2% growth, which was an anomaly caused by the pandemic’s first shock.
Many private economists now forecast full-year growth of less than 4%, which would be the weakest annual expansion since 1991, when China’s economy grew 3.9% in the aftermath of the Tiananmen Square crackdown and international sanctions. The slowdown has global implications. China accounts for about 18% of global GDP and is a major buyer of commodities, so weaker growth has already pushed down prices for iron ore, copper and oil.
For the United States, China’s slump could reduce demand for American exports and multinational corporate earnings, while also easing some inflationary pressures. The story is developing, with upcoming data releases and policy meetings in late 2022 likely to shape the final outcome.
