With Businesses Struggling to Survive, Chinese Economy Feels the Severe Impact

As the year 2022 is coming to a close, what economic performance will China present before the year ends? How will it welcome 2023? As it stands, the answer has already been determined.

This answer appears to be an ending that is much below the expectations of many, and it is also certainly an ending that was not conceived during the country’s annual parliamentary meetings the Two Sessions back in March. The Chinese economy suffered an unexpected blow in the first and the second halves of this year, respectively in the second quarter and the fourth quarter, both of which were related to the COVID-19 outbreaks. The pandemic in the second quarter and the large-scale lockdown of the Yangtze River Delta region led to the economic growth of only 0.4% in that quarter. In winter this year, the currently raging novel coronavirus outbreaks are more serious than in the first half of the year, a situation where ANBOUND’s researchers have warned back in the springtime, and will severely impact the country.

The impact of the pandemic with its two major outbreaks this year has dealt a heavy blow to the Chinese economy. Not only that it would be improbable for the country to achieve the 5.5% economic growth that it initially set, but there will also be a huge gap. Researchers at ANBOUND believe that if the economic growth in 2022 is calculated at 3.5%, it means that the economic value added will be RMB 2.28 trillion less than the planned target. Fitch Ratings said not long ago that due to the impact of China’s COVID-19 policy, the downturn in the real estate industry, and the slowdown in export growth, it is estimated that its economic growth will only be 2.8% in 2022 and 4.5% in 2023. The Institute of International Finance (IIF) estimates that China’s economic growth rate in 2023 may only be around 2%.

The macroeconomic stall, at the medium and micro levels, signifies that the development of the industry has felt a major setback, with a large number of businesses forced to cease their operations. This spells an increase in the unemployment rate and a decrease in personal income. For many micro-entities, it is indeed a life-and-death situation.

Taking the food and beverage (F&B) industry as an example, this industry’s revenue in China reached RMB 4.7 trillion in 2021, a year-on-year increase of 18.6%. In 2022, however, things turned worse. Shanghai, Beijing, Chengdu, Guangzhou, Chongqing, Zhengzhou, Xi’an, Guiyang, and other major cities across the country have almost all encountered repeated COVID-19 outbreaks. Insufficient consumption and frequent prohibitions of dine-in have brought difficulties for F&B businesses. According to media research, many F&B owners said that by the end of this year, the industry will experience a new round of closures and enter what they called the “darkest days”. Data from the corporate information provider Qichacha shows that, since the beginning of this year, as of November 28, 2022, a total of 495,457 F&B-related companies have suspended or canceled their businesses. Behind the shocking data are countless restaurants struggling to stay alive. Many shops, after much hardship, and survived the two years of cold winter, have finally collapsed this year under the unpredictable COVID-19 outbreaks.

It is not only businesses that feel difficulties, but also the government as well. After three years of the COVID-19 measures, not only the development of businesses has been affected, but the government’s finances have also been impacted. On the one hand, the slowdown in tax revenue has led to a sharp drop in the increase in fiscal revenue or even negative growth. On the other hand, COVID-related and other public service expenditures with unknown costs have emptied the financial base of government at all levels. This has also expanded the government’s debt.

According to data released by China’s Ministry of Finance, from January to September this year, the national general public budget revenue was RMB 15,315.1 billion, a decrease of 6.6% on a natural basis. Among them, the national tax revenue was RMB 12,436.5 billion, a drop of 11.6% on a natural basis. Non-tax revenue was RMB 2,878.6 billion, an increase of 23.5% over the same period of the previous year. Accumulated from January to September, the national government fund budget revenue was RMB 4,589.8 billion, a decrease of 24.8% over the same period of the previous year. The income from the transfer of local state-owned land use rights was RMB 3,850.7 billion, a drop of 28.3% over the same period of the previous year. Among the taxes related to land and real estate, the deed tax was RMB 439.5 billion, a year-on-year decrease of 27.1%. The land value-added tax was RMB 516.6 billion, a year-on-year decrease of 8.9%. In terms of expenditure, from January to September, the national general public budget expenditure was RMB 19,038.9 billion, an increase of 6.2% over the same period of the previous year. The decline in government fiscal revenue while the rise in expenditure is basically a state of shelling out the existing resources.

Both the central and local governments are short of money. In the first three quarters of 2022, the fiscal revenue of the 31 provincial-level administrative regions was RMB 8,321.64 billion, a year-on-year decrease of 4.9% or RMB 428.77 billion. Among the various provincial units, except Inner Mongolia, Shanxi, Shaanxi, Xinjiang, and other energy-rich provinces, as well as Ningxia and Jiangxi, the fiscal revenue of the other 25 provincial-level administrative regions has experienced negative growth. Considering the pressure on local fiscal expenditures, local fiscal deficits have become the norm. In the first half of 2022, the balance of revenue and expenditure of general public budgets in 31 provincial-level regions in China was negative。 From January to August 2022, the balance of revenue and expenditure of general public budgets in Shanghai turned from negative to positive, and the rest of the 30 provinces remained negative.

The unprecedented financial pressure has even made it difficult for local governments to pay for COVID-testing expenditures. According to certain media reports, Shandong Province spends nearly RMB 3 billion a month on routine COVID testing alone. A prefecture-level city in Shandong Province requires 70% of public-funded influenza to be borne by district and county finances. A county-level city has financial difficulties and has stopped public-funded COVID projects. Two county-level cities under the city are unable to repay interest due to serious financial debts. The Shandong Provincial Department of Finance has bypassed the city and directly took over the two county-level cities to implement financial backing. Jimo District of Qingdao City and Huantai County of Zibo City have issued notices to stop the payment of vaccines in 2022. Yantai City, Jining City, Dezhou City, Zibo City, and other areas in Shandong Province began to reduce the salaries of civil servants due to financial constraints. Mudanjiang City of Heilongjiang Province and Daowai District of Harbin are experiencing fiscal deficits, while civil servants and public institutions in the jurisdictions pay 80% of their salaries. Furthermore, all funds for disease control in the district have been suspended. Due to widespread local financial pressure, from Shenzhen in southern China to Hangzhou in the east, and then to the capital Beijing, civil servants and staff of financially allocated public institutions across the country have cut their salaries to varying degrees, with some areas having salary-cut for more than once. The morale of civil servants has generally been hit by this.

All these have a certain effect on ordinary people as well, where their incomes are reflected on the consumption side. According to data released by the country’s National Bureau of Statistics (NBS), in October this year, the total retail sales of consumer goods fell by 0.5% year-on-year, and the growth rate slowed down by 3.0 percentage points from the previous month. NBS statistics show that in the first three quarters of this year, the per capita disposable income of Chinese residents across the country was RMB 27,650, a nominal increase of 5.3% year-on-year; a real increase of 3.2% after deducting price factors. The per capita disposable income of urban residents was RMB 37,482, a nominal increase of 4.3% year-on-year, and a real increase of 2.3%. The per capita disposable income of rural residents was RMB 14,600, a year-on-year nominal increase of 6.4% and a real increase of 4.3%. The median per capita disposable income of national residents was RMB 23,277, a nominal increase of 5.1% year-on-year. In fact, one needs to be cautious with the growth of per capita disposable income of residents under the background of multiple unfavorable factors such as issues in the national economy, industrial development, business operation, and employment. Judging from some actual situations, a considerable number of households too, are also shelling out the existing resources

For the past two years, researchers at ANBOUND have insisted that the most crucial issue facing China at this stage is none other than economic security. The obvious economic stall, continuous COVID-19 measures, and long-term industry downturn are hollowing out the financial foundation of the country, its businesses, and individuals. If this situation continues, the resilience of the Chinese economy will be broken, causing China to face systemic economic and social risks. This is a major risk that requires high vigilance from the relevant authorities.

READ MORE ANALYSIS ABOUT THE REAL CHINA HERE: https://t.me/PublicPolicyThirdChannel

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ANBOUND

ANBOUND is a multinational independent think tank, specializing in public policy research, incl. economy, urban and industry, geopolitical issues. Est. 1993.