China’s second-quarter GDP: five things to watch

During a visit to Wuhan last month, President Xi Jinping acknowledged that the Covid-19 shutdowns were hurting China’s economy, but added that it was better to “temporarily affect economic development a bit rather than endanger the health and safety of persons”.

On Friday, the National Bureau of Statistics will quantify the “small” price Xi insists is worth paying in pursuit of his “zero-Covid” approach when he releases his estimate of economic growth in the second trimester. Here are five things to look for in Friday’s release.

To what extent was the impact of regional shutdowns in the second quarter greater?

The world’s second-largest economy grew by 4.8% in the first quarter of 2022, below the government’s full-year growth target of 5.5%. The NBS’s first-quarter figure captured lockdowns in the central city of Xi’an and Jilin province, a major agricultural and industrial hub, but not Shanghai’s two-month lockdown that took full effect in April.

The second-quarter estimate will also reflect much reduced economic activity in recent months in Beijing, which has not implemented an extended citywide lockdown like in Shanghai, but has brought large parts of the capital for weeks.

As a result, economic expansion is likely to be the slowest since the first quarter of 2020, when a de facto nationwide lockdown in response to the initial outbreak in Wuhan led to an unprecedented contraction of 6.8%.

Will officials admit that their full-year GDP growth target of 5.5% is unachievable?

Many organizations and investment banks have already said so, lowering their full-year projections for China’s economic growth.

In June, the World Bank officially revised its full-year estimate of China’s economic growth to 4.3% from 5.1% in December.

“This revision largely reflects the economic damage caused by the Omicron outbreaks and prolonged shutdowns in parts of China from March through May,” the World Bank said. He also predicted “aggressive stimulus measures to mitigate the economic slowdown” in the second half.

Global investment banks are equally pessimistic. Economists at Goldman Sachs, Citi, JPMorgan and Morgan Stanley have all lowered their growth estimates for 2022 to between 4% and 4.3% in recent months. Goldman cited “Covid-related damage to the economy in the second quarter” for its revised projection.

Is a stimulus wave gathering?

A frequent criticism of the Chinese government’s annual growth targets – including, in the private sector, from reform-minded officials – is that they are responsible for “artificial” growth driven by local governments for the sole purpose of reach the goal.

Such growth for growth’s sake is often debt-fueled and wasteful, a habit Xi and his economic advisers, led by Vice Premier Liu He, have vowed to end. But it’s a hard habit to break when local governments across the country need economic growth to create jobs and fund their operations, regardless of the longer-term debt they’ve incurred.

This reflex is already in motion. According to people familiar with related policy discussions in Beijing, local governments across China will be allowed to issue additional bonds worth 1.5 billion Rmb ($223 billion) this year to spur growth in China. Bern.

The Chinese government has set this year’s bond quota, mainly used by local governments for infrastructure projects, at 3.65 tn Rmb, of which 1.5 tn Rmb has been advanced by the end of 2021.

In March, the State Council, China’s cabinet, said the remaining 2.2 billion yuan of bonds for 2022 should be issued by the end of September. The additional Rmb1.5tn would be carried over from next year’s quota.

Is the tide finally turning for the real estate sector?

Recently released credit figures also suggest the race to achieve 5.5% growth is on. New credits totaled Rmb5.2tn, well above expectations and almost 11% more than in May.

The increase was partly due to cuts in the benchmark interest rate used to price mortgages and Rmb 848 billion in household loans, in line with the June 2021 figure, when China’s breakout of Covid seemed more assured. Property sales in June fell 9.5% year on year, compared to a drop of more than 48% in May.

Larry Hu, chief China economist at Macquarie, said the “darkest moment for the property sector”, China’s biggest economic engine, may finally be over.

Will more blockages dash hopes of a rebound in the second half?

Xi’s trip to Wuhan sent an important signal, reiterating the sanctity of zero-Covid. The city was the site of the Chinese Communist Party’s first victorious battle against the pandemic and the country’s first major lockdown.

Similar victories have since been declared in Shanghai and many other cities that have successfully implemented strict containment measures to crush local outbreaks.

Xi visited Wuhan at a time when it looked like life had fully returned to normal in Shanghai, Beijing and many other cities affected by the lockdown.

But the virus often responds to these claims of success with another more transmissible but not more lethal variant, raising questions about the wisdom and sustainability of zero-Covid.

Shanghai residents are already bracing for another potential lockdown this week as the BA.5 variant spreads across China.

Additional reporting by Cheng Leng in Hong Kong and Sun Yu in Beijing

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