China’s economy shrank in the three months ending June compared with the previous quarter after Shanghai and other cities closed to combat coronavirus outbreaks, but the government said a “steady recovery” is underway after the reopening of businesses.
The world’s second-largest economy shrank 2.6%, down from an already weak 1.4% in the January-March period, official data showed on Friday. Compared to a year ago, which may hide recent fluctuations, growth fell to 0.4% from 4.8% in the previous quarter.
Activity was “much weaker than expected,” Rajiv Biswas of S&P Global Market Intelligence said in a report.
Asian stock markets were mixed on the news. Hong Kong was down 0.8% by mid-morning, while Shanghai, Tokyo and Seoul gained.
Antivirus checks shut down Shanghai, the site of the world’s busiest port, and other industrial hubs from late March, fueling concerns global trade and manufacturing could be affected. Millions of families were confined to their homes, depressing consumer spending.
“The resurgence of the pandemic was effectively contained,” the statistics office said in a statement. “The national economy registered a stable recovery.”
Data on factory output, consumer spending and other activities suggest overall growth was even weaker than the headline figure, Julian Evans-Pritchard of Capital Economics said in a report.
“Even allowing for the strength in June, the data is consistent with last quarter’s negative year-over-year growth,” Evans-Pritchard wrote. “This is not the first time that official GDP figures have apparently underestimated the extent of an economic downturn.”
The drop hurts China’s trading partners by depressing demand for imported oil, food and consumer goods.
China’s infection numbers are relatively low, but Beijing responded to its biggest outbreak since the start of the pandemic in 2020 with a “zero-COVID” policy that aims to isolate all people who test positive. The ruling party went on to quarantine individual buildings or neighborhoods with infections, but those restrictions covered areas with millions of people.
Repeated closures and uncertainty about business conditions have devastated entrepreneurs creating new wealth and jobs in China. Small retailers and restaurants have closed. Others say they are struggling to stay afloat.
Cheng Hong, mother of one of the owners of the Qifei travel agency in Shijiazhuang, southwest of Beijing, said business is down more than 80%.
“I almost couldn’t hold on, but I’m lucky to see the beginning of a recovery,” Cheng said.
The ruling Communist Party promises tax refunds, free rent and other help to get businesses back on their feet, but most forecasters expect China to fall short of the ruling party’s 5.5% growth target this year.
Other major economies are reporting growth compared to the previous quarter, making their levels appear lower than China’s. Beijing for decades reported only growth compared to the previous year, which hid short-term fluctuations, but it has begun to publish quarterly figures.
Forecasters say Beijing is using cautious, targeted stimulus rather than across-the-board spending, a strategy that will take longer to show results. Chinese leaders worry that spending too much could drive up politically sensitive housing costs or that corporate debt is dangerously high.
Growth for the first half of the year was 2.5% from a year earlier, one of the weakest levels in the last three decades.
Retail sales fell 0.7% from a year earlier in the first half after falling 11% in April.
Song Haixia, a shopkeeper selling food and cigarettes in the northern city of Taiyuan, said sales have fallen as much as 70% to as little as 300 yuan ($45) a day. She said that migrant workers who were among her clients were scared away by anti-virus measures.
“People just don’t make money,” said Song, 45, a mother of two. “I am not very optimistic about future prospects.”
Investment in factories, real estate and other fixed assets rose 6.1%, reflecting the ruling party’s effort to spur growth by increasing spending on public works construction and ordering state-owned companies to spend more.
China is also facing headwinds due to weak global demand. Exports rose 17.9% in June from a year earlier, but forecasters say that reflected ports clearing cargo after anti-virus restrictions were lifted. They say growth is likely to recede.
Slowing growth in the United States and Europe “could weaken demand for China’s manufacturing exports,” Biswas said.
China quickly recovered from the pandemic in 2020, but activity weakened as the government tightened controls on the use of debt by its vast real estate industry, which supports millions of jobs. Economic growth slumped due to a drop in construction and home sales.
Investors are waiting to see what happens with one of China’s biggest developers, Evergrande Group. It has been fighting since last year to avoid defaulting on $310 billion owed to banks and bondholders.
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