Maintaining Economic Resilience is now Sine Non Qua for China
In the last few decades, China’s economy experienced numerous rounds of upheavals, but it managed to recover swiftly each time. Those events point to the economic resilience of the Chinese economy.
China has been able to continually disprove claims of imminent economic collapse thanks to its economy’s resilience. The country has a clear direction and the right path to emerge as the world’s second-largest economy.
What is the resilience of an economy? In general, growing economies such as those investment-focus ones are usually not resilient. Comparatively, economies driven by consumption are more resilient. Accordingly, economic resilience refers to the section of the economy’s capacity to mitigate economic risks.
Factors that contribute the most to economic risks are the production and consumption of daily necessities. However, forging an economy’s resilience is not an overnight success. It takes time through the outcome of sustained efforts.
For the Chinese economy, economic resilience at times refers to continuous economic growth. This can be explained in a variety of ways, such as late mover advantage, demographic dividend, comparative advantage, open market, innovative system, globalization, and so on. However, from the perspectives of developmental characteristics and human spirits, economic resilience is multifaceted.
Thus, contributory factors to economic resilience include having robust industrial and market systems, a synergistic and enduring workforce, entrepreneurship, and a nation in unity. Other factors are economic and social capacities in withstanding setbacks, relentless determination to succeed, sustained motivation and determination in addressing failure, joint-morale, hard work of entrepreneurs and workers, and so on.
China’s sustained economic growth is credited to its economic resilience. However, there is no guarantee that the economy will remain stable indefinitely. Economic resilience can be broken, regardless of its strength.
The situation occurs when an economy’s progress is confronted with two critical challenges: persistent system tightening and a worsening economic climate. A breakdown of economic resilience is extremely destructive. The ramifications will reach deep into the national economic system. As a result, regaining economic resilience is a long and difficult process.
According to researchers at ANBOUND, China’s current economy is approaching a critical state due to numerous tiers of domestic and international pressure. If such challenges and the negative trend continue, its economic resiliency may be jeopardized. As a result, maintaining the country’s economic resilience will be the most serious task it faces in the future.
Some may wonder if the opinion of China losing its economic resiliency is overly pessimistic. As a third-party think tank, ANBOUND conducts research and makes judgments based on objective information and logical links. Being optimistic or pessimistic is the outcome of seeing reality subjectively, rather than objectively. Careful observation of the current Chinese economy and market system would uncover many problems and risk indicators.
The first observation concerns the threats facing the resilience of business groups. Business communities in China have been operating under intense pressure in 2022. In the past, they strived for development, but now in 2022, they are battling for survival. All large, medium-sized, and small businesses in China are currently facing unprecedented challenges in terms of survival and development.
Despite their vast resources and sound economic foundations, many corporations are altering their strategy in this difficult period. These large corporations come from various industries, including the capital-hungry internet sector, traditional manufacturing, financial services, and education services, as well as the real estate sector.
Tencent, Jingdong, ByteDance, Alibaba, and the Midea Group, for example, are all undergoing strategic downsizing. “The management did not resort to any tightening or optimizing measures in 2020, even though it was afflicted by all sorts of COVID-19-induced obstacles and difficulties,” Chairman of Midea Fang Hongbo said in response to a retrenched employee with a long experience with the company. However, the economic impacts and pressures we are facing at this moment are simply too great. Only after more than a month of recurrent deliberations and struggle in decision-making did the management and I make this painful decision on retrenchment”.
Small and medium-sized enterprises are hit even harder by the current economic situation. Business closedowns and bankruptcies are prevalent in the country. Following COVID-19 outbreaks in 2020, small- and medium-sized enterprises had experienced one round of turbulent ordeal.
After two years of suffering, these businesses have been impacted by a wave of even more strict pandemic prevention and control in 2022. Business closedowns are increasingly common under the increasingly tight and widely adopted prevention and control policies.
Even in megacities such as Shanghai and Beijing, many micros, small and medium-sized enterprises cannot survive the persistent strict lockdowns. In the otherwise busy business areas within the cities, the pervasive scene of empty office space and buildings resulting from business closedowns is a shocking scene.
In Beijing, following citywide dine-in prohibition, many eateries are now closed. Meanwhile, those who open claim they are operating at a loss with at least a 40% drop in business. In Shanghai where it has endured two months of lockdowns, many small and medium-sized enterprises have stopped operations. Small businesses and microservice companies, which used to be a part of everyday life in Shanghai, have no chance of surviving.
Small- and medium-sized companies in the service industry are the main providers of employment. Their departure has resulted in a large group of unemployed personnel. Official data showed that as at end of April 2022, the existing market in the country had 0.158 billion market players and recorded a comparatively high growth rate of 10.5%. However, it should be noted that the number of market players refers to the turnover of old enterprises and the entry of new enterprises. As things stand, new enterprises cannot rival old enterprises in sustaining employment and the economy.
The second observation concerns consumer groups’ resilience breakdown. Since 2020, China has witnessed a slowdown in income growth and consumption growth. Due to continuing COVID-19 related measures, there has been a distinct contraction in consumption activities within the country.
This situation is especially evident during repeated city lockdowns when individuals from all walks of life replace their diversified consumption patterns with a focus on basic survival. Data from the National Bureau of Statistics show that in April 2020, total retail sales of consumer goods recorded an 11.1% year-on-year decline. This decline in statistics is a further drop compared to the -3.5% recorded in March.
In the hardest-hit Shanghai city, the month of April saw a 48.3% year-on-year decline in total retail sales of consumer goods. What accounted for this near-fifty-per cent decline in total sales of consumer goods was a 46.3% year-on-year sales decrease in the wholesale and retail trade and a 69% corresponding decrease in hospitality and F & B.
There is a close connection between consumption slowdown and increased unemployment pressure. In March this year, a survey conducted in towns nationwide showed an unemployment rate of 5.6%, representing an increase of 0.3 percentage points compared with February. In April, the unemployment rate was 6.1%, a similar persistent 0.3 percentage points increase compared to March. From January to April 2022, the average unemployment rate recorded is 5.7%.
Further details on this average unemployment rate for towns across the country are as follows: 5.7% and 6.9% for locally registered residents and non-locally registered residents respectively; 18.2% for 16–24 year-olds; and 5.3% for 25–50 year-olds. As for the thirty-one big cities and towns in the country, the unemployment rate revealed in the survey is 6.7%.
When statistical considerations are taken into account, the actual unemployment rate is likely to be significantly higher than the figures given above. Many people have become accustomed to “flexible employment,” which is basically equivalent to “unemployment.” Under realistic expectations of employment and income, sluggish consumption will persist for a rather lengthy period. In return, this condition will hamper the recovery of activities in industry, investment, and commerce.
The third observation concerns challenges facing the financial resilience of local governments. Following the deteriorating economic slump, growing aging population, and increased public service demand in recent years, government finance has seen a significant increase in income-expenditure imbalance. The government’s drive to simultaneously tighten expenditure and improve public services coincides with a rising shortfall in the balance of payments.
Meanwhile, China’s financial situation continues to be strained amid increased pressure for the central government to clear out local debts, rectify debt hikes and guard against financial risks. According to the fieldwork report of ANBOUND researchers, certain localities are unable to sustain the finance for the “three guarantees” (i.e., guaranteeing payment of salaries, normal operation of grassroots government, and the basic wellbeing of the people) since a few years ago, such financial strains would have increased in recent years. In 2022, with the implementation of policies toward large-scale tax reduction, financial contractions at the local level are even more apparent.
According to the data, a significant number of cities recorded a drop in financial revenue of more than 30%. Shenzhen’s general public budget revenue fell by 12.6 % from January to April this year, with April revenue falling by 44%.
For other cities in the corresponding period, the year-on-year revenue decrease is as follows: 15.1% and 54.9% for Nanjing; 10.4% and 49.6% for Suzhou; 3.45% and 37% for Hangzhou; 3.8% and 36.1% for Ningbo; 10.69% and 35% for Zhongqing; 4.73% and 29.8% for Wuhan. For Guangzhou, the corresponding data are a 1.22% increase and a 12.76 decrease.
From the aforementioned data, during the January to April period, most of the top ten cities in China witnessed a trend of negative growth. It’s worth noting that, while all of these wealthy cities have bad financial performance, poorer cities have considerably worse financial conditions.
The financial downturn and budget cuts have had a severe impact on local government agencies. Local civil officials in many parts of the country have been subjected to salary cuts. In addition, a small number of local civil servants’ real income has even been reduced by 20%, according to ANBOUND researchers’ incomplete comprehension.
If the phenomenon of diminishing salary combined with increased work volume under the COVID-19 prevention and control continues for too long, civil workers will surely experience negative emotional effects. As a consequence, this predicament will cause fatigue and negligence in work performance.
China’s economic resilience is being challenged. As such, the strained economic situation is reflected in the typical economic growth index. The 5.5% economic growth target defined during this year’s national “Two Sessions” event obviously needs to be revised.
More specifically, in light of the economic problems caused by the war in Ukraine and COVID-19 outbreaks, it is necessary for China to revise its economic targets and strategies.
Many large institutions in the county have already lowered their expectations of China’s economic growth. Some of them expect a mere 2.1% growth rate for the second quarter of this year. In a research report published on 19 May, Bloomberg Economics forecasts China’s annual GDP growth to be 2% this year. This figure is a much lower rate compared to the official forecast rate of 5,5%. According to the report, “stimulus is failing to get much traction due to the restrictions on activity”. Based on statistics in the report, a 2% GDP growth would amount to China’s lowest economic growth since 1976.
The unprecedented challenges currently confronting China’s economic resilience are related to both national and international situations. The greatest source of the challenges is probably the impact of COVID-19 within the country. The most effective measure for resolving the problem is to change the guiding policies.
The implication is to strike a balance between the demand for COVID-19 measures and the demand for economic development. To ANBOUND researchers, under the existing international and domestic situations, China should not take the “at all costs” approach in dealing with the novel coronavirus outbreaks.
There are multiple implications to the idea of “people first, life first.” On one hand, the idea explicitly means disallowing the pandemic to spread and cost lives. On the other hand, there is also the consideration of preventing economic collapse that distresses businesses and ordinary people’s livelihood.
Final analysis conclusion:
It is critical to protect China’s economic resiliency now. There is no path to a whole range of things without economic security.
Writer by He Jun
Partner, Director of China Macro-Economic Research Team and Senior Researcher. His research field covers China’s macro-economy, energy industry and public policy.
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