By Aikana Williams
Distant seem the days when China was labelled the world’s ‘economic miracle’ which had grown to become the world’s second largest economy, rightfully claiming its status as an ‘economic superpower’. In an unexpected turn of events, headlines pervading news outlets in recent months have described China’s economy as being ‘sluggish’, and that ‘the era of very rapid growth in China is probably now over’. Indeed, China has experienced its slowest rate of economic expansion in 40 years, with its GDP expanding by only 0.4% in the second quarter from a year earlier, a significant decline from the growth of 4.8% in the first quarter. Overall, China’s GDP fell by 2.6% in the three months to the end of June from the previous quarter, with the IMF cutting its forecast for China’s GDP growth in 2022 to 3.3%, which falls significantly below the government’s target of 5.5%.
The weakened momentum of China’s economy can be most closely attributed to the country’s adherence to a rigid zero-covid policy. Within the last month, eight megacities have been forced into either full or partial lockdowns, all of which are crucial manufacturing and transport hubs that are home to a total of 127 million citizens. Goldman Sachs has estimated that cities that have been impacted by the stringent lockdown measures account for 35% of China’s GDP. These measures have increased the rate of youth unemployment, with the unemployment rate among 16 to 24-year-olds currently at an all-time high of 19.9% in July. Another unintended consequence of the lockdowns has been an increase in the provision of fines, which has been used to plug budgetary holes. Last year, 80 out of 111 cities in China increased the amount they collected in fines for seemingly arbitrary ‘violations’, with a city in Shaanxi province imposing a fine of 66,000 yuan on a grocer for selling 2.5kg of subpar celery.
The zero-covid lockdowns have also contributed to the deterioration of the property market, a sector that is already suffering from major economic losses. What was once emblematic of China’s rise is now the source of a major loss of confidence in the government’s economic model, as the value of new home sales have fallen by 29% and property investment by 12% in the past year. The property market downturn was precipitated by the Chinese government’s introduction of the “three red lines” campaign, which President Xi Jinping prefaced by declaring that “housing is for living in, not for speculation”. The policy was enforced in an attempt to curb speculative trading and minimise lending to high-risk borrowers that are likely to default but has inadvertently led to buyers dropping out, borrowers going on mortgage strikes and developers facing a liquidity squeeze whilst consumer confidence in the housing market erodes simultaneously. To exasperate the already dire situation, the zero-covid restrictions have prevented potential home-buyers from viewing houses and flats, whilst the fear of the sudden closure of businesses and the potential of being laid off have all impacted the consumer psyche and instilled fear within the population that does not encourage nor incentivize homebuying.
So, why then, is China willing to absorb the economic and social costs of its rigid zero-covid policy as opposed to reviving its weakening economy? Much of it has to do with maintaining the legitimacy of the Chinese Communist Party (CCP). With Xi Jinping seeking his third term in office in a few weeks, it is vital that he upholds the image of the CCP as a dominant and influential party. The alternative to lockdowns and a slowdown in economic activity brought about by the zero-covid policy are the hospitalizations and deaths of hundreds of Chinese civilians, which “represents an even greater threat to the government’s legitimacy”. The CCP’s ability to enforce the population’s compliance to such stringent policies is further evidence of the party’s strength, and therefore, by extension, Xi Jinping’s leadership. Projecting this authority and power is more vital now than ever to Xi, as he also believes that it is emblematic of China’s superior social model.This demonstrates China’s desire to continue projecting influence over the Northeast Asian region as well as the rest of the world, and present itself as a rising superpower. However, China should be aware that its policies may be having contradictory effects, especially in the realm of global trade. China’s share of global trade is expected to fall 50% between 2021 and 2026, to 13%, as a result of its weakening economic activity. This will have an impact on the wider structure of global trade, as the declining prominence of China as a trading hub will allow trade to spread across a wider variety of regions. It is expected that ASEAN countries will overtake China in their growth of exports and imports, followed by South and Central Asia and Sub-Saharan Africa. It is possible that after numerous decades of shifts towards the east, “the centre of gravity of world trade is poised for a turn south”. This long-term effect on China’s balance of power within the international system that will be brought about if its economy continues to decline is perhaps being overlooked in favour of minimising covid-19 infections.
Overall, China’s prioritisation of pursuing a zero-covid strategy is incurring severe economic costs on its own population. Youth unemployment is at a record high, the property market is collapsing, and China’s level of global engagement through trade is declining in tandem with the deterioration of its own economy. Despite this, Xi Jinping and the CCP have made evident their willingness to absorb these economic and social costs in favour of projecting the party’s strength and upholding their legitimacy. There may potentially be a softening in its policies in early 2023 after Xi’s political future has been assured, but, until then, China will focus on saving lives, not the economy.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.