Covid-19 curbs seen as factor in growth outlook of Chinese regions

BEIJING • China's economy grew at the slowest pace for two years in the second quarter of this year, as Covid-19 lockdowns disrupted manufacturing hubs and stifled everyday life.

Although most provincial-level areas grew faster than the national rate, a few regions were a drag on growth. National gross domestic product (GDP) grew just 0.4 per cent year on year during the three-month period, tumbling from 4.8 per cent in the previous quarter, according to National Bureau of Statistics (NBS) data released last month. It is the worst performance since the first quarter of 2020, when the country was shocked by the outbreak of Covid-19, which led to a 6.9 per cent contraction in GDP.

Many localities have stepped up policies to help businesses and people in trouble, such as jobless migrant workers. Some have vowed to keep stimulating the economy by supporting infrastructure investment and helping consumer spending recover.

However, many of the local authorities are strapped for cash. In a July 15 note, Nomura Holdings economists led by Dr Lu Ting said that "despite a significant rise in credit support from the central government, we expect local government financial conditions to deteriorate further".

Land sales revenue, a key source of income for local governments, nosedived 31.4 per cent in the first half of the year amid an ongoing property sector crisis, according to data from the Ministry of Finance. That will significantly constrain "local government function and infrastructure investment", the economists said.

Outbreaks of the Covid-19 Omicron subvariant affected almost all of China from March to June, leading many local governments to apply stringent containment measures, locking down regions and suspending some business activities under the country's zero-tolerance strategy.

The biggest losers included the provincial-level regions of Shanghai, Beijing, Hainan, Jilin, Jiangsu and Zhejiang, which either saw their GDP shrink or growth rate slide. Shanghai's GDP plummeted 13.7 per cent in the second quarter against the same period last year, while its surveyed urban jobless rate shot up to 12.5 per cent. Business in the municipality ground to a halt during a strict lockdown in April and May.

Beijing's second-quarter GDP growth slid to 2.9 per cent year on year. It posted a high base number in the same period last year, when Covid-19 vaccine production picked up pace and contributed to growth in industrial output, said Ms Zhu Yannan, a spokesman for Beijing Municipal Bureau of Statistics.

But the capital also suffered from a month-long Covid-19 outbreak in May, when the local government halted some businesses, partially suspended public transit and urged people to stay at home. Its GDP grew just 0.7 per cent in the first half.

Hainan's economy was squeezed by a drop in its key industry, tourism. In April, May and June, the number of tourists to the island fell 56 per cent, 40 per cent and 17 per cent, respectively, compared with the same periods last year. During the second quarter, Hainan's GDP dropped 2.5 per cent, while it has recorded 1.6 per cent growth for the first half.

Some regions fared better, with resource-rich areas posting strong growth during the three months. Rising prices of raw materials like coal since last year were a boon to regions such as Shanxi, Gansu and the Inner Mongolia autonomous region, all of which achieved at least 3 per cent second-quarter growth.

Covid-19 restrictions were eased in many parts of the country in June, production gradually resumed, and consequently economic indicators improved. Total industrial production of major enterprises in Shanghai grew 15.8 per cent year on year by value in June, reversing a 27.6 per cent decline in May.

The U-turn was partly thanks to a sharp rebound in manufacturing of automobiles, computers, as well as communications and other electronic equipment. The growth momentum held up last month, with industrial production rising 16.1 per cent year on year.

But despite the various upticks in June and July, economists predict the central government will likely miss its GDP growth target of around 5.5 per cent for this year, after just 2.5 per cent first-half growth.

Weak growth is expected going forward, despite a low baseline for the third quarter, said the Nomura economists, who remain "cautious on the growth outlook in the second half".