Tag Archives: Coronavirus

World Bank Lowers China Growth Forecast

The World Bank's Global Economic Prospects, June 2022 update cover page

THE WORLD BANK has cut back its forecast for China’s economic growth this year by 0.8 of a percentage point to 4.3%.

The revision to its forecast in January comes in the latest update to its Global Economic Prospects report.

The Bank forecasts 5.2% growth next year and 5.1% in 2024. Its revision for 2023 is only a 0.1 of a percentage point reduction.

The World Bank is usually among the more optimistic forecasters of China’s GDP growth. A projection for this year so below the official target of 5.5% growth underlines the severity of the economic headwinds China faces; not that many expect the official target to be hit.

The Bank expects the global economy to slow to 2.9% growth this year and not rebound next.

Following more than two years of pandemic, spillovers from the Russian Federation’s invasion of Ukraine …. is leading to high commodity prices, adding to supply disruptions, increasing food insecurity and poverty, exacerbating inflation, contributing to tighter financial conditions, magnifying financial vulnerability, and heightening policy uncertainty… Moreover, the outlook is subject to various downside risks, including intensifying geopolitical tensions, growing stagflationary headwinds, rising financial instability, continuing supply strains, and worsening food insecurity.

On China, the Bank says that strict lockdowns to control Covid-19 outbreaks have been the main reason for slowing growth. Consumer spending has been particularly subdued, and trade and manufacturing investment have lost momentum, exacerbated by supply disruptions and the negative impact of the war in Ukraine.

The pandemic has also reversed the recovery of the real estate investment seen at the start of the year.

In response, authorities have already relaxed some property and financial regulations and eased fiscal and monetary policy. However, the Bank expects more stimulus measures to mitigate the impact of the lingering pandemic and worsening terms of trade.

The Bank is uncertain about the size, composition and effectiveness of policy stimulus, noting that increased investment in the stock of public infrastructure — the tried and trusted measure authorities are most likely to turn to — faces diminishing returns.

The outlook is subject to significant risks.

Repeated COVID-19 outbreaks and strict lockdowns across major cities would curtail the recovery of consumption and services activity, disrupt supply chains, and weigh on investor confidence. In addition, renewed stress in the housing sector would further reduce real estate investment and government revenues, affect the solvency of developers and local government financing vehicles, and weigh on house prices and consumer spending.

It is Covid-19 that hangs heaviest over the outlook. The Bank estimates that a resurgence could reduce China’s growth by a further 0.5 of a percentage point in 2022 and 0.3 of a percentage point in 2023.

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Shanghai Reopening Would Be China’s Most Powerful Stimulus Measure

Shanghai waterfront skyline seen in an archive 2015 photograph

THE EASING OF the lockdown in Shanghai on June 1 may prove the most crucial stimulus measure that authorities take to revive China’s economy and get it anywhere near the official target of 5.5% GDP growth this year.

The more-than-two-month-long lockdown has not been lifted entirely, though there is no staggering of the easing. Most people can move more freely around the city, provided they can show a green health code on their smartphone. Public transport within the city has restarted. Crucially, many businesses are reopening their doors, with in-person customers having to show a negative Covid test within the previous month 72 hours.

However, 10% of the population of 25 million residents in high-risk areas will remain confined at home. Confirmed Covid cases and close contacts still face quarantine or hospitalisation. A localised outbreak risks the reimposition of a neighbourhood lockdown. Residents returning from trips outside the city still need to quarantine. Schooling remains remote, and places of mass entertainment remain shut.

Nonetheless, word reaches this Bystander that the mood in the city is far more one of celebration and relief than the noble forbearing that official media portrays. That, in itself, is likely sending a message to city officials, who have not emerged from the lockdown covered in glory.

Residents have been angry at the strictness of the measures, city officials’ ineptness in enforcing them, leading to, for example, food shortages, and the fact that much of the financial aid has gone to businesses and factories, not to households.

The economic cost has been tremendous. An academic paper published earlier this year gives a sense of the likely scale of the cost — full percentage points of GDP. Shanghai is the country’s biggest and most affluent city and its financial, commercial and international business hub. It accounts for 3.8% of China’s GDP and 10.4% of China’s trade with the rest of the world (2021 data).

It will likely take months for the city’s economy to be operating at anything like normal again, not least because supply chains need to stabilise first.

The manner of the easing of the lockdown allows both President Xi Jinping and Premier Li Keqiang to maintain their positions on the need for the zero-Covid policy and the need to reopen an economy facing multiple headwinds, respectively.

Earlier this week, government departments started to flesh out the details of the 33-point stimulus package that Li announced on May 23. The measures are broad-ranging, including tax cuts, business subsidies and loans, and infrastructure investment. As important as staving off a potential recession, the stimulus aims to stabilise employment, the government’s short-term priority.

The measures also included initiatives such as streamlined customs and immigration intended to bolster the confidence of foreign firms manufacturing in China who might be thinking this is a time to look elsewhere.

The critical but beleaguered property sector has had separate support measures, including interest rate cuts.

The economic impact of getting Shanghai back to normal business would mean more to the national economy than all of the above.

Shanghai’s lockdown has been the most disruptive but only one of several in major cities that have provided a stark reminder of China’s willingness to throw the economy into turmoil when political priorities demand it.

As Li has repeatedly warned, the official target of 5.5% GDP growth is undoubtedly out of reach. Much has been speculated about a rift between Xi and Li ahead of the autumn’s Party Congress, the truth of which is probably impossible to know. Sometimes, economic tumult is just economic tumult.

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No Going Back For China On Zero-Covid

Chart showing daily new confirmed COVID-19 cases in China, 7-day rolling average. Source: Our World in Data

EVEN THOUGH NEW Covid-19 infections have peaked, Shanghai city authorities are imposing stricter control measures, an indication of the intensifying political dimension to the zero-Covid policy on which President Xi Jinping yet again pinned his personal colours at the Politburo Standing Committee on May 6.

Shanghai is already under what is now more than a month’s-long lockdown that has seen deaths, caused economic disruption and kindled social unrest amid localised food shortages and disgruntlement about city authorities’ management of the situation.

More mass testing and stricter enforcement of mandatory quarantine for those testing positive or who have co-residents, not just family or close neighbours who test positive are on the way. Residents have reportedly received notices of the imposition of ‘quiet periods’ of three to seven days in which they will not be allowed outside and non-essential deliveries will be halted.

Beijing, too, is extending quarantine measures and making its lockdowns less ‘lite’ in a bid to avoid the capital becoming a second front in ‘the battle for Shanghai’.

As this Bystander has noted before, the top leadership is in a bind. Under- and ineffective vaccination has left it with little option but to persist with trying to achieve zero-Covid. Treating the pandemic as endemic now would likely trigger a wave of deaths that would undermine the narrative of China, unlike the heartless West, putting the lives of its citizens above economic considerations.

Yet the longer it persists with zero-Covid, the less choice it has but to continue it. Politically, Xi cannot make a U-turn, especially with a critical Party Congress coming up in the autumn. The messaging by state media and censorship of social media will negate public criticism of Xi, while local officials will be under pressure to fall into line.

The same may hold less true in elite circles, even if criticism remains muted. Few if any will take the gamble of speaking out loudly against Xi now, cognizant that his power may be far greater after the Party Congress.

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World Bank Cuts China Forecast As Uneven Recovery Gets Rougher

THE WORLD BANK has trimmed its GDP growth forecast for China this year to 5.0%, 0.4 of a percentage point lower than its previous forecast made in October last year. The Bank says that growth could slow to 4.0% on a worst-case basis.

The new numbers are contained in the Bank’s latest update to its economic forecasts published ahead of its joint Spring meeting with the International Monetary Fund.

The reasons for the growth downgrade are familiar: a spike in Covid-19 infections causing strict lockdowns and disruption of supply chains, continuing strains on overleveraged property developers, the Russian invasion of Ukraine raising commodity prices, and tightening US monetary policy.

The Bank also highlights China’s structural slowdown and regulatory regime change.

It has this to say about China’s approach to containing Covid-19:

Eliminating CoViD-19 infections through a combination of testing-tracing-isolation and targeted shutdowns entailed a relatively small economic cost when the COVID-19 variants were less infectious. However, the highly transmissible but seeming less potent Omicron variant has increased the economic costs and reduced the health benefits of an elimination strategy. Both services and manufacturing PMis dropped in January reflecting CoViD-19 flare-ups and strict control under Beijing’s zero CoViD strategy.

Despite the changing tradeoffs, China is maintaining the strict strategy, perhaps because (a) tolerating low levels of infection may not be a stable equilibrium, (b) a spike in infections could overwhelm China’s limited health capacity in rural areas, and (c) the omicron variant may still have serious health consequences for China’s population because it has suffered fewer prior infections and been inoculated with a less effective vaccine.

The Bank estimates that the impact of pursuing zero-COVID will likely be to reduce 2022’s output by about 0.6%.

A longer-term Covid-related question raised by the Bank is whether the interruption caused by the pandemic to the trend decline in China’s share in the final-goods imports of the United States and the rising sourcing of intermediate goods from China by regional countries is temporary or not.

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China’s First-Quarter GDP Growth Raises An Eyebrow

Chart showing China's quarterly GDP growth year on year from 2019 to date

THERE HAS BEEN much about China’s latest surge in Covid-19 infections to cause a raised eyebrow.

That its largest city Shanghai, now entering its fourth week of strict lockdown, has only just officially reported its first three virus-related deaths is one. The first-quarter GDP figure announced today by the National Bureau of Statistics, at 4.8% growth year-on-year, is another.

Thre is a huge political incentive for officials not to report Covid-19 deaths, given Beijing’s doubling down on its narrative that its zero-Covid policy in prioritising saving citizens’ lives is superior to the West crass re-opening at any cost. That and ultra-narrow criteria for ascribing a death to Covid make it highly likely that Covid-19 deaths have been undercounted on a scale in China that far exceeds undercounting elsewhere.

Local officials have long suspected overcounting economic activity, although much less so of late. Yet every tallying muscle must have been strained to record 4.8% y-o-y GDP growth in the first quarter and 1.3% growth from the final quarter of 2021. Private economists had forecast around 3.5% and barely 1.0%, respectively.

It may well be that growth was sufficiently strong in the first two months of the quarter that it offset much of the sharp slowdown evidenced by March’s drop in retail consumption and slowing industrial output and investment spending. (It is also prudent to remember that these are preliminary data that may yet get revised.)

Retail sales contracted 3.5% from a year ago, the first decline since July 2020; industrial output growth decelerated to 5% from the 7.5% expansion in January-February. Investment growth also slowed to 9.3% in the first quarter from 12.2% in the first two months of the year.

The relative strength in industrial production and investment is surprising given the already-reported weakness in some of the sector numbers underpinning them, such as sharp falls in car and cement production.

The economic damage inflicted by Covid lockdowns would have intensified toward the end of March, with Shanghai going into lockdown on March 28. A group of economists at Chinese and US universities estimated that a month-long lockdown of the city would cut 2.7% off national GDP for the month.

Shanghai is now entering its fourth week of a lockdown that has closed many factories. The longer the lockdown-induced impacts on production drag on, the larger the spillover effects through supply-chain disruptions on the rest of the economy.

Beijing will be anxious to minimise those given the multiple headwinds the economy is facing, few, such as the Russian invasion of Ukraine with its consequent impact on commodities prices, within its control.

The Ministry of Industry and Information Technology has sent a team to help more than 600 companies in Shanghai restart operations, including those producing computer chips, cars and car parts, medical supplies and equipment and pharmaceuticals. ‘Closed-loop’ bubbles for industrial workers will be imposed. Limited production at plants supplying Apple and Tesla resumed this way over the weekend.

Less easy to address and politically more concerning is the rise in unemployment the lockdowns are causing. At 5.8% in March, joblessness was at its highest level since the early part of the pandemic.

The economy is likely to get worse in April before it gets better. China’s ambitious goal of 5.5% GDP growth for the year looks distant. Increasingly frequent warnings from top leadership about the economic headwinds from geopolitical tensions, inflation pressures and slowing external demand underline this.

More monetary and fiscal stimulus is inevitable to bridge the economy to the point where more effective vaccination can relieve the necessity for economy-sapping lockdowns to contain a virus whose increasingly contagious if less deadly mutations are outrunning zero-Covid’s capacity to contain them.

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Counting The Economic Cost of Zero-Covid

Screenshot of title page of 'The Economic Cost of Locking Down Like China, by Jingjing Chen et al.

CHINA HAS TRADED economic growth for saving lives in the pandemic — the quid pro quo of its zero-Covid policy — and criticised Western nations for doing the opposite.

A new paper by five economists from Chinese and US universities, led by Jingjing Chen of Tsinghua University, seeks to put a hard number on that hit to the economy.

It is a large one.

The quintet estimates that if the four big cities of Beijing, Shanghai, Guangdong and Shenzhen underwent a one-month full-scale lockdown, China’s real GDP would fall by up to 8.6% during the period.

They reached their estimate by analysing real-time data of inter-city road haulage rather than the more commonly used measure of consumption declines.

Applying their model to the most extreme case scenario — all Chinese cities put into full-scale lockdown for one month — GDP would decline by 53% in the month.

It is unlikely, but not impossible given the Omicron breakthrough, that Beijing, Shanghai, Guangdong and Shenzhen would be put into lockdown simultaneously for that long. Nonetheless, the authors point out that a full-scale lockdown of a single big city would be sufficient to impact national GDP:

The largest three effects come from Shanghai, Beijing and Shenzhen, where full-scale lockdown will knock 2.7%, 2.5% and 1.8% off the aggregate real income, respectively.

The paper gives academic backing to Shanghai authorities’ efforts to avoid a full-scale lockdown of the country’s financial and commercial hub for as long as possible.

The authors note that their research looks at only the short-term impacts of citywide lockdowns and does not consider the effects on expectations and saving and investment decisions in the longer term.

The authors also conclude that a city’s economic size is the primary determinant of the aggregate effect of locking it down. Yet, a city’s position in the country’s trade network plays a more significant role in the spillover effects. These can account for about 10% of the aggregate impact.

The strictness, severity and persistence of China’s lockdowns make international comparisons difficult. However, the authors say that the economic losses caused by Chinese lockdowns are four times as large as those caused by the Italian and Canadian lockdowns in the second quarter of last year.

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Omicron Continues To Challenge China’s Zero-Covid

Chart showing 7-day rolling average of daily new confirmed Covid-19 cases.

WORKD REACHES US of panic food buying in Guangdong. Residents are stripping supermarket shelves bare, fearing the possibility of a Shanghai-style citywide lockdown following the discovery of new Covid-19 cases in Guangdong’s provincial capital. Authorities are due to start mass testing. Given Beijing’s doubling down on its zero-Covid policy, restrictions on movement will surely follow.

Meanwhile, Shanghai authorities are suggesting some slight easing of the severe lockdown residents there have been under for more than a week. They will categorise districts into three types according to the level of risk from Covid. Once a section achieves the least risky status, some of the strict restrictions on movement may be eased locally.

That will still take some time to pass. All infectious cases will have to be moved to within centralised Winter Olympic-like ‘closed-loop’ central facilities first so the outbreak is contained there and cannot spread. Jilin in the northeast is only just coming out of its lockdown after 33-days.

China’s largest city and financial and commercial hub is still struggling to provide the locked-down with basic food supplies and medical care. However, reports say the situation has stopped getting worse and is improving in some districts as the logjams in distribution start to ease.

Shanghai has experienced China’s worst coronavirus outbreak since the early days of the pandemic. The under vaccination of the elderly and relative ineffectiveness of China’s vaccines — Sinovac cuts the death rate tenfold for over-80s but is roughly half as effective as the Pfizer-BioNTech vaccine — have painted Beijing into a corner.

It has little option but to stick with its zero-Covid policy despite its inability to deal with the rapid spread of the high-contagious but less fatal Omicron variant. Nonetheless, zero-Covid now no longer means zero local cases but zero local cases outside quarantine facilities.

Attempting to live with the virus as other countries are now doing would likely result in a politically unacceptable wave of deaths and hospitalisations until widespread vaccination with more effective vaccines could be achieved on a mass scale. That would require a national roll-out of an indigenous mRNA vaccine that would take months to administer the initial two shots.

It would also undercut the official narrative of how China’s success in keeping the death rate low by international standards stands in contrast with Western governments’ willingness to accept high death rates among their citizens in order to reopen economies.

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Shanghai Covid Surge Will Have Political Fallout

SHANGHAI’S COVID-19 OUTBREAK is becoming a political and medical emergency.

The country’s financial and commercial hub is struggling to contain the mainland’s worst outbreak of infection since the initial one in Wuhan in early 2020.

Officials reported 8,000 new cases on Saturday, a new daily record, and more than 13,000 on Monday as mass testing got into fuller swing.

The city tried to avoid a total lockdown because of Shanghai’s economic importance, opting for a two-phase policy that started on March 28. That has failed to contain the outbreak and become chaotic.

The city’s hospitals, short of beds and medical services, have struggled to cope. The mass testing programme has experienced delays in getting results. Feeding 25 million people in lockdown is proving to be a logistical challenge.

Nationally, China has reported no new deaths from Covid-19, although unofficial reports of deaths in Shanghai have been circulating for some days.

As in Hong Kong, low and ineffective vaccination rates among the elderly appear to have exacerbated the situation. The Donghai Elderly Care Hospital in eastern Pudong has reportedly suffered a severe outbreak of infections.

A senior Party official, Ma Chunlei, has said Shanghai was not sufficiently well prepared for the outbreak, a rare public admission of shortcomings in a city regarded for its administrative competence.

This has prompted a mobilisation of external assistance not seen since the pandemic’s early days. Vice Premier and Politburo member Sun Chunlan, who oversaw the strict anti-Covid regime at the recent Beijing Winter Olympics, was sent to the city at the weekend to provide political and administrative direction.

She stressed ‘unswerving adherence’ to the zero-COVID approach and told the city’s officials to improve their quarantine management. She also told police to guarantee social order in lockeddown areas and treatment facilities, a hint perhaps that residents’ exasperation is boiling over beyond social media.

The People’s Liberation Army has now mobilised 2,000 personnel and other provinces sent 36,000 people to help the city.

The first lockdown, covering everyone east of the Huangpu River, which includes the financial centre in Pudong, has been extended. With phase two, covering the city’s western side, still in effect, the whole city is now locked down.

It is unclear how long that will last, but it will likely stay in place until the medical situation stabilises, perhaps another week or more.

Shanghai’s mild experiment in easing back from the zero-Covid policy has backfired. That will have economic ramifications for an already slowing economy and how any further big-city outbreaks are handled.

Even more, it will have political ramifications ahead of the Party Congress in the autumn that will depend on how the top officials of the influential Shanghai party come out of the medical crisis.

There will be a new raft of Politburo leaders to accompany President Xi Jinping’s likely third term, over which the Shanghai faction would expect to have some sway. Local Party secretary, Li Qiang, had been tipped as a possible replacement for Li Keqiang as premier. He will look like a less safe pair of hands now.

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Shanghai Goes Into Lockdown

Chart showing 7-day rolling average of daily new Covid-19 infections in China. Source: Our World in Data.

SHANGHAI IS NOT only the largest city to date to be locked down, but China’s financial and commercial hub.

Authorities, who have been battling an outbreak of Covid-19 for a month, had put off doing so for as long as possible because of the potential economic cost. However, a spike in cases has forced their hand.

The necessity of action will be a disappointment as the national surge in new cases is now falling following lockdowns to counter the outbreaks in Jilin province, Xi’an and Shenzhen, the last a spillover from the massive outbreak in Hong Kong.

However, the 3,500 new cases recorded in Shanghai on March 27 accounted for more than half the national total. 

From today, the city is being locked down in two phases for mass testing over the next nine days, starting with everyone east of the Huangpu River, which includes the city’s financial centre in Pudong. The city’s western side is due to go into lockdown from Friday.

Public transport has stopped. Firms have been instructed to suspend operations or work remotely. However, where workers can be confined on-site and follow ‘closed-loop’ testing protocols, factories can continue to operate to mitigate the economic damage. Similar steps are being taken to minimise supply-chain disruption.

Authorities are trying to avoid a larger-scale disruption to production in Shanghai than in Jilin, where the Toyota factory, among others, has been idle for more than two weeks.

Keeping half a city of 25 million people functioning during a lockdown is the furthest China has gone to ease its strict zero-Covid policy involving mass lockdowns and testing to contain surges of infection. However, the contagious Omicron variant is testing the approach severely.

Beijing will not readily abandon zero-Covid, as its willingness to lock down its most populous and wealthy city attests. Yet, it will aim to minimise the economic impact with continuous fine-tuning of the strategy.

Nonetheless, the knock-on effect on the national economy is likely to see the government introduce additional stimulus, including interest-rate cuts, in the near term.

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China’s Coronavirus Surge In Two Charts

Chart of 7-day rolling average of reported new Covid-19 infections in China. Source: Our World in Data. Licenced under CC-BY

THE CHART ABOVE is the latest rolling 7-day average of reported new cases, sourced from John Hopkins University and graphed by Our World in Data.

The one below shows the geographic distribution of the latest outbreaks, sourced from the National Health Commission and graphed by Bloomberg.

Map of China showing geographical distribution of Covid-19 surges. Source: National Health Commission via Bloomberg

Neither chart requires further commentary.

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