China’s economy performed better than expected in the first two months of 2022, but that was followed by a sudden resurgence of Covid-19 infections. Going forward, how will the pandemic impact economic growth for the rest of the year?
China’s economic data for the January-to-February period unexpectedly beat estimates in areas including exports, consumption and investment, which rose year-on-year by 13.6%, 6.7% and 12.2% respectively. This led some analysts to believe that China’s economy is out of the woods, while others had reservations about the data.
Both views may have neglected the same factor: impact of the base effect. Prior to the announcement of the data, the market did not have high expectations due to a high base of comparison — data in early 2021 rose sharply compared with the same period in 2020. The reality is that there wasn’t a high base effect as the economy’s good performance in early 2021 only partially made up for the rapid economic downturn caused by the pandemic in early 2020.
In the first two months of this year, fixed-asset investment jumped 12.2% year-on-year. But if we compare it with the figure from the same period in 2019, the average year-on-year growth for this period in the three years was just only 4.6%, which is a similar figure to the 4.9% increase for the entire year of 2021. Therefore, if we eliminate the base effect, we can see that investment has not accelerated significantly. Retail sales showed a decent 6.7% increase in the first two months of this year, but the three-year average year-on-year growth was just 4.3%.
In contrast, China’s exports in the period painted a different picture, with a three-year average year-on-year growth rate of 12.7% that far exceeded that of retail sales and investment.
As more developed countries gradually ease social distancing restrictions, their household consumption will shift from goods to services (such as tourism), which may reduce demand for China’s exports. And when China’s competitors gradually resume normal production, Chinese exports will face greater competition.
In any case, a closer look at the data for the first two months of 2022 suggests that the Chinese economy did not pick up significantly at the start of the year. Even if we do not consider the economic risk posed by the resurgence of Covid, China would already need to work hard to achieve its economic growth target of around 5.5%; now, with a new wave of Covid-19 flare-ups, the uncertainties are even greater.
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Despite the resurgence of the domestic Covid epidemic, the number of confirmed cases in China remains low compared with other countries. However, many Western countries have chosen to coexist with the virus, so as long as their health care systems are well equipped to cope with critical cases, the number of confirmed cases will not impact their Covid-19 control measures. On the contrary, China’s “zero-Covid” approach means that a relatively small case number is still enough to shut down a city.
On March 15, five economists from Tsinghua University, Zhejiang University, Princeton University, University of International Business and Economics, and the Chinese University of Hong Kong jointly published an article titled “The Economic Cost of Lockdown in China: Evidence From City-to-City Truck Flows.” The article analyzed intercity truck flow data and the cities under lockdown between the second quarter of 2020 and January 2022, to derive the economic impact of lockdowns.
There are several conclusions drawn in the article. Firstly, the impact on freight traffic is vastly different when a city undergoes a full lockdown versus that of a partial lockdown (when only a few districts are closed off). If a city goes under a full lockdown for a month, freight traffic will decrease by 54%, whereas if a city goes under a partial lockdown, freight traffic will decline by at most 20%. From this perspective, the economic cost of maintaining economic activities in certain areas of a city is far smaller than that of a full lockdown.
In addition, if a city undergoes a lockdown, its economic and trade exchanges with other cities will be affected, which will have a negative effect on other cities. The magnitude of the spillover depends on the economic status of the locked-down city.
Based on these factors, the article’s forecast is that if the four most important economic centers of the country — Beijing, Shanghai, Guangzhou and Shenzhen — are shut down for one month at the same time, their real income in that month will decrease by 61%, while the national real income in the same period will decrease by 12% — that translates into a 1% decline in annual GDP. (Editor’s note: An updated version of the paper was published on April 3, in which the national real income decline in the event of a one-month full-scale lockdown on the four cities was revised to 8.6%.)
The highly contagious omicron variant could spread to multiple cities before summer, and therefore there could be more cities going under a full or partial lockdown at different times. The lockdowns of these cities, which may account for about 10% of the national GDP, could lead to China losing about 10% of is GDP in the second quarter. That would mean China’s GDP growth this year may be reduced by between two and three percentage points if these lockdowns happen. If so, achieving the full-year growth target of around 5.5% may be difficult.
Vincent Chan is a China strategist at investment advisory firm Aletheia Capital.
The article has been edited for length and clarity.
Contact translator Kelsey Cheng (kelseycheng@caixin.com) and editors Bertrand Teo (bertrandteo@caixin.com) and Lin Jinbing (jinbinglin@caixin.com)
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