Country Sees Sluggish Recovery Despite End of Zero-COVID Policy

China’s economic recovery has been torpid despite Beijing having ended its zero-COVID policy. It is important for the administration of Chinese President Xi Jinping to boost the economy through flexible policy management.

Real gross domestic product in China grew 6.3% in the April-June period compared to the same quarter last year. This was largely a reaction to the stagnation of economic activity in the previous year due to the lockdown in Shanghai.

The growth rate compared to the previous quarter, the main economic indicator used by Japan and other developed countries, was only 0.8%, or 3.2% on an annualized basis. This decreased from the reading for the January-March quarter and was well below Beijing’s annual target of “around 5.0%.”

In January this year, the Chinese government lifted its zero-COVID policy, which was designed to contain the spread of the novel coronavirus through strict restrictions on social activities. Observers say the current situation is unexpected, as ending the policy was viewed as a way to stimulate cooling consumption, and the economy was expected to recover rapidly.

The market downturn in the real estate sector — which is estimated to account for 30% of GDP together with related businesses — is having an impact.

This was triggered by measures such as the Chinese government tightening regulations on loans in an effort to calm soaring real estate prices. There is also a structural factor, as the number of young people who purchase homes has started to decline due to the aging of the population and the declining birthrate.

In China, real estate accounts for a significantly higher percentage of household assets than in the West. As a result, a negative wealth effect is occurring, in which declining real estate prices have reduced consumer confidence.

While it is reasonable to suppress real estate prices to correct disparities, the Xi administration has not been able to implement effective economic stimulus measures to compensate for the related effects.

In China, the main source of revenue for local governments is from the sale of land-use rights for real estate development. Consequently, the sluggish real estate market has led to financial difficulties for local governments, making it difficult for them to implement economic stimulus measures.

Recovery of employment, which had worsened due to the zero-COVID policy, has also been slow, and the unemployment rate for people ages 16-24 exceeded 20% in June. As anxiety about the future has not dissipated, a tendency to save money has taken hold, especially among the younger generations. The situation is such that China is suffering from the aftereffects of the zero-COVID policy.

The Xi administration has tightened its control over the information technology industry, which has been raking in profit, and cram schools, which have increased competition over entrance exams. Some argue that such coercive measures are a contributing factor to the economic slowdown.

Without an emphasis on policies to boost the vitality of the private sector, China cannot expect stable growth.

China is Japan’s largest trading partner, and if its economy stalls, the impact on Japan will be significant. The Japanese government needs to keep a close eye on economic trends in China.

(From The Yomiuri Shimbun, July 23, 2023)