China’s statistics agency released even more bad news on Friday when it released its latest Q2 growth figures. An enormous coronavirus lockdown in Shanghai – with a population of 25 million – and harsh protective measures elsewhere in the country have left a gaping hole in the creaky economy. In the three-month period from April to June, the economy is in China grew a meager 0.4 percent — the slowest pace since the start of the pandemic in early 2020.
This is a marked slowdown from the first quarter of this year, when the economy was up 4.8 percent. All in all, growth for the first half of the year is only 2.5 percent.
The Covid pandemic has continued to cripple the world’s largest economy, but despite the massive economic struggle so far this year, Xi and his government appear reluctant to abandon its ambitious growth target of 5.5 percent for this year.
At the end of last month, the Chinese president promised that the country will “take more effective measures to achieve the 2022 social and economic development goals”.
But that will only succeed if the Chinese economy somehow manages to find a way to grow between seven and eight percent in the remaining two quarters of this year.
Last month alone, regional governments issued a record £240bn in new bonds – a huge 143 percent increase from the previous year – believed to be used to launch new infrastructure projects.
In a desperate attempt to boost the pressured economy, local governments have reportedly been given the green light to issue significantly more infrastructure bonds.
The originally planned £460bn quota has practically been used up, and Bloomberg estimates that as much as £930bn could be made available for new infrastructure.
A recent slowdown in economic growth due to Omicron’s new outbreak and the lockdown measures imposed on tens of millions of people has meant that investment in infrastructure is now taking center stage.
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The Chinese government is faced with a conundrum: make sure that the debts don’t get out of hand, but weigh that against the use of the money.
Officials must choose between “old infrastructure” such as more rail lines, roads and airports, or so-called “new infrastructure” including the expansion of artificial intelligence, blockchain, cloud computing, big data and 5G networks.
Spain’s BBVA Bank economists Jinyue Dong and Le Xia believe China’s efforts could be enough to deliver 4.5 percent growth.
There are other factors at the heart of this: in June, exports rose 17.9 percent to reach the strongest growth in five months, but these could be the result of a boost after Shanghai came out of lockdown.
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But Jens Hildebrandt, executive board member of the German Chamber of Commerce in China (AHK), said: “Foreign trade figures show a mixed picture.
“Exports are recovering further due to better-functioning logistics. However, the now very low import growth points again to a weakening economy.”
Max Zenglein of the China Institute Merics in Berlin said: “The middle class is increasingly feeling the effects, for example through stagnant incomes or falling real estate prices.
“This increases the political pressure on the government to find solutions.”
But there are warnings that without significant upward movement in the economy, China could face a rise in default rates in the coming months.
Mr Zenglein added: “The government’s most effective economic stimulus program would be to turn away from the draconian zero-Covid strategy.”
Additional reporting by Monika Pallenberg.