Washington, DC – Ahead of the 20th Party Congress of the Communist Party of China (CPC), two of the world’s biggest investment banks have slashed China’s economic growth forecast. Goldman Sachs and Nomura have both cited COVID- related lockdowns which curbed business and consumer activity in July 2022 for their latest assessment. Nomura, the Japanese financial holding company, which continues to maintain one of the lowest estimates for China’s growth, reduced its projection for Gross Domestic Product growth to 2.8 percent from 3.3 percent. Meanwhile, Goldman Sachs on Wall Street lowered its 2022 full-year forecast to 3.0 percent from 3.3 percent. This cut in China’s anticipated growth sends a negative outlook even as it grapples with political stability ahead of the Party Congress. Even official sources in China had indicated last month that it might miss its GDP goal for the year. Hence, China’s economy, both at the central and provincial levels, faces considerable stress.
The global financial majors cited weaker demand, energy crunch, and uncertainties stemming from China’s zero-COVID policy as primary reasons for the cuts, reflecting deepening investor gloom about China’s growth target of 5.5 percent. Before this development, China’s Central Bank slashed the key interest rate to help bolster growth, while local governments are expected to sell more bonds to boost spending.
Production cuts in some parts of China have become common, as one of the worst heat waves in decades strains an already stressed power supply. Nomura economists assess that “in contrast with some people’s concerns about too much policy stimulus in H2 [second half of the year], the real risk is that Beijing’s policy support may be too little, too late, and too inefficient.”
Understanding the costs of China’s zero-COVID policy and declining fiscal revenue is essential. Not only is this affecting the national economy, it is also putting enormous financial stress on local governments, sometimes forcing authorities to slash public services and delay salary payments to civil servants. Stringent coronavirus controls such as mass testing have become an enormous burden for local governments, who are also facing tumbling revenue from land sales due to a slump in the property market, tax cuts, and rebates to rescue their economies from COVID-19 outbreaks.
Official data shows that during the first seven months of the year, China’s fiscal revenue dropped by 9.2 percent year on year. Tax revenue came in at nearly 10.27 trillion yuan (US$1.5 trillion) over the same period, down 13.8 percent from a year earlier. The central government collected around 5.74 trillion yuan in fiscal revenue, a decrease of 11.2 percent, while local governments collected 6.75 trillion yuan, a fall of 7.6 percent. Experts assess that reducing expenditures, such as cutting officials’ salaries and benefits and even reducing head counts, is unlikely to alleviate fiscal pressure. Reports indicate that in a few small towns in Yunnan, civil servants have not been paid for more than six months.
China’s jobs market has been one of the main casualties of the zero-COVID policy. It is not fully reflected by the official unemployment rate, although it remained elevated at 5.4 percent in July, down from 5.5 percent in June and 5.9 percent in May. More significantly, joblessness among 16-to-24-year-olds is still at a high. The rate continued to rise in July to a record 19.9 percent, compared with 8.5 percent in the United States in July, 13.6 percent in the European Union in June, and 4.4 percent in Japan in June. The bottom line is that one in five young mainlanders, including many graduates, are unable to find a job. This was the reason Vice Premier Hu Chunhua called for more effective measures to stabilize unemployment, especially for graduates.
The context for youth unemployment can be found in the economic effects of China’s COVID clampdown, especially on the private sector, which is the primary source of employment for young people in China. Most youths are first employed as interns or trainees. They are the first to be hit when companies tighten their belts. The services sector, which is the major area for this type of employment, has been severely hit by COVID restrictions. Further, those living in rural areas or third or fourth-tier cities and typically going to the big cities to look for jobs have been unable to do so due to COVID restrictions which make travel more difficult and expensive.
Youth unemployment reflects the economic reality of China. Still, with importance being given to regime stability in the run-up to the 20th party congress expected in October 2022, it also becomes a political issue.
China is expected to relax the tight COVID restrictions, which are at the root of the June 2022 quarter’s almost zero economic growth. However, with the focus entirely on the party congress, the CPC will likely leave it to Premier Le Keqiang to try to shake off the economic malaise.
China’s economic growth in the June quarter was only 0.4 percent. Poor industrial and consumption growth in July did nothing to raise hopes of significant improvement in the third and fourth quarters, which could be reflected by a fall in youth unemployment. The implications of this for fund managers are greater prospects of losses in stocks, outflows from bonds, credit defaults, and a weaker currency.
The muted reaction to China’s fiscal stimulus plans and interest-rate cut exemplifies a trend that’s been intensifying in recent months: Xi Jinping’s government appears to have become increasingly powerless in economic terms. The expectation of dramatic interventions five months ago, dubbed by some as China’s “Draghi” moment (in comparison to the 2012 European Central Bank President’s promise to save the Euro), has turned into skepticism over whether policymakers will do whatever it takes to bolster financial markets. While China will undoubtedly move on, this forward movement will come with a price, one that will also have implications for the global economy.
