2022 is an important political year for China. The country has historically been presented with a fundamentally different internal and external environment due to fresh changes in geopolitics, economics, as well as the COVID-19 pandemic at home and abroad. The likelihood of a Chinese economic downturn appears to be strong. This year, stabilizing the economy has become a primary focus.
Currently, the international geopolitical turmoil, in addition to local pandemic conditions and their prevention and control measures are the two main factors affecting China’s economy. Relatively speaking, the latter has a more significant impact on its economy. The lockdown in Shanghai and other places in April has led to the interruption of transportation and logistics across the country. The Chinese economy is expected to decline more in the second quarter after slowing to 4.8% year on year in the first quarter.
Data from the National Bureau of Statistics of China shows that April’s manufacturing purchasing managers’ index (PMI) was about 47.4%, down 2.1 percentage points and it was the lowest since March 2020. The five sub-indicators of the economic health of the manufacturing sector are all below the critical point. The production index is 44.4%, the new orders index is 42.6%, the inventory levels index is 46.5%, the employment environment index is 47.2%, and the supplier deliveries time index is 37.2%. Compared with March, these indices decreased by 5.1, 6.2, 0.8, 1.4, and 9.3 percentage points, respectively. The China Caixin Manufacturing PMI index, which focuses relatively on small and medium-sized enterprises, was 46% in April, down 2.1 percentage points from March and the lowest since March 2020. Both PMI data show that China’s manufacturing sector slowed across the board in April.
Services appear to be hit harder than manufacturing. Only a few service industries (such as capital markets) could conduct business transactions over the Internet. Most other service industries such as tourism, hospitality, offline commerce, offline catering, and movies faced major problems. In Shanghai, which has been completely closed for nearly two months, the service industry has undoubtedly been hit hard. On the other hand, Beijing has been partially closed since the end of April due to an increase in COVID-19 cases.
The catering business has canceled dine-in meals, indoor projects are not allowed, and travel between Beijing and the rest of the globe has been drastically reduced as part of new lockdown orders. As the service sector accounts for more than 83% of Beijing’s entire economy, this wave of pandemics will undoubtedly have a substantial impact on the city’s economy.
When comparing the Chinese economy with the international economy, stark differences are revealed. Many economies in the world have been hit passively by high inflation, wars, and energy crises. Meanwhile, in China, the impact is rather active, as the domestic economy is largely affected by the pandemic and tight controls. Stringent policies have slowed the economic recovery to some extent. In the past two years, China has taken the lead in resuming production and consumption activities. Today, since the beginning of this year, various economic activities and tourism in many countries have recovered rapidly, yet China is still deeply impacted by the pandemic and prevention measures.
Unfortunately, there is still no sign of the lockdown being lifted in Shanghai, Yangtze River Delta’s largest metropolis. Many small and medium-sized businesses are failing, with commercial challenges and increased unemployment, as a result of the more than month-long lockdown and people continue to stay at home.
In March this year, the national surveyed urban unemployment rate is 5.8%, an increase of 0.3 percentage points from the previous month. The actual unemployment rate may be significantly higher than the above figures. At present, Beijing has entered a state of partial lockdown due to the pandemic. The immense impacts of the lockdowns in Shanghai and Beijing on the regional and national economies are impossible to ignore. In Shanghai alone, the scale of the impact on the local economy is as high as RMB 300 billion a month. Given the current state of the economy, such high costs is a heavy toll. The central government has repeatedly emphasized that the prevention and control measures are the best choices to beat the pandemic at the lowest possible economic cost. In actuality, the economic and human costs of pandemic prevention and containment are enormous. Thus, costs and benefits should be balanced in public policy.
In the face of the severe economic condition, ANBOUND’s researchers recommend that stabilizing the economy and people’s livelihood should be the top priority this year. The economy and people’s livelihood are the foundation of politics. If these groundworks are precarious, they would inevitably affect the country’s politics this year.
The central government has taken notice of these issues for some time. The Politburo of the Chinese Communist Party held a meeting on April 29 to analyze the current economic condition. According to public reports, in the meeting, the pandemic and the Russia-Ukraine crisis have led to increased risks and challenges. China’s economic development environment is becoming increasingly complex, severe, and uncertain. Stabilizing growth, employment, and prices are facing new challenges. Therefore, it is necessary to maintain the economy and effectively protect and improve people’s livelihood. Overall, the meeting focuses on pandemic prevention, economic stabilization, and sustainable development.
The dynamic clearing policy emphasizes the importance of safeguarding people’s lives and health to the greatest extent possible. At the same time, the adverse impact of the crisis on economic and social development should be minimized. Macroeconomic policies should achieve the goals of economic stability and social development in the year. These include tax rebates, tax cuts, and fee reductions, and various other monetary policy tools. Risk management and control must effectively maintain the bottom line that there should be no systemic risk in terms of sustainable development. The three goals of pandemic prevention, economic stabilization, and sustainable development are clear requirements put forward by the central government. As this is an order issued by the country’s highest decision-making level, the tasks must be accomplished accordingly.
The emphasis is on developments that are necessary to meet the central government’s objectives. There are currently no policies that are particularly clear and effective. Three specific industries may see policy changes, according to the conference notification.
The first is related to real estate. The meeting sticks to the principle that “housing is for living, not for speculation.” The purpose is (1) To support local governments to improve real estate policies based on local conditions; (2) To meet rigid and improved housing needs; (3) To optimize the supervision of pre-sale funds for commercial housing; and (4) To promote the stable and healthy development of the real estate market. This is a moderate relaxation of China’s real estate regulation, and some real estate markets are expected to be revitalized. After years of regulation in the real estate industry, the real estate market has been in a downturn. Real estate companies that were doing well are now facing debt crises. Homebuyers are no longer enthusiastic about the real estate market. Financial capital began to flee the market as well.
The second touches the stock market and holds the following doctrines: (1) To respond to the concerns of the stock market promptly; (2) To steadily advance the reform of the stock issuance registration system; (3) To actively introduce long-term investors; and (4) To maintain the stable operation of the capital market. The prolonged slump in China’s stock market, clearly disproportionate to the size of the country’s economy, has been frustrating for shareholders. China’s stock market remains subdued even amid the deliberate relaxation of the global environment. The Chinese stock market has become an indicator of policies and politics. Policy and regulatory authorities should focus on boosting the steady rise of the stock market and carry out institutional reforms to protect capital, investors, and the market.
The third is to pay attention to the platform economy, with the aim: (1) To promote the healthy development of the platform economy; (2) To complete the special rectification of the platform economy; (3) To implement normalized supervision; (4) To introduce specific measures to support the standardized and healthy development of the platform economy. The platform economy is mostly concerned with policy rectification. In the past two years, the platform economy has been in the process of system rectification, anti-monopoly, anti-unfair competition, anti-financial risks, and combating the savage expansion of capital. The Politburo meeting indicates that the economic rectification is coming to an end. If this phase really halts, it would be good news for the stock market.
ANBOUND recommends stabilizing the economy for the simple reason that local challenges could only be addressed if economic fundamentals are solid. In the process of economic stabilization, the core is to let the market relax moderately and allow companies to grow in a predictable environment.
Final analysis conclusion:
The most crucial goal for China this year is to stabilize its economy, as economic volatility and people’s livelihoods may very well become political issues. Relaxing the policies at the right time, as well as boosting the market development would both be essential to achieve this aim.
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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