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From property to lockdowns, what to watch in China’s second half

admin2022-08-258

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Careful navigation: A worker producing containers at a factory in Nantong, China. Economists are watching with an eagle eye how the government handles the coronavirus outbreaks and property market. — AFP

SHANGHAI: China’s economic outlook for the second half of this year will be determined by the government’s shaky control over coronavirus outbreaks and the property market.

Early signs look negative. Daily covid cases have risen to the highest level since May, leading to more local lockdowns.

In addition, a mortgage strike in dozens of cities is increasing households’ awareness of property developers’ inability to complete housing projects, potentially triggering a further downward spiral in the vast sector.

After growth almost ground to a halt in the second quarter, the bearish outlook has economists lowering their full-year forecasts closer to 3%, well below the government’s target of about 5.5%.

That is yet another drag for a world economy grappling with the fastest inflation in decades, war in Europe and the ongoing Covid pandemic, and comes as the International Monetary Fund is set to “substantially” cut its global economic growth outlook.

China’s gross domestic product (GDP) growth of just 0.4% in the second quarter was the second lowest ever recorded. The biggest cause was lockdowns in dozens of cities in the spring to stop the spread of the omicron coronavirus variant.

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“Nothing can be worse than the large-scale city lockdowns and the halt of economic activities,” said Gary Ng, economist at Natixis SA.

China is subject to a “Covid Business Cycle (CBC),” Nomura Holdings Inc economists argued in a recent note.

First, increasing cases trigger business closures. Once cases come down, government stimulus leads activity to rebound, possibly leading to a new surge in Covid cases.

With new variants such as BA.5 recently detected in several cities, the pace and length of lockdowns is deeply unpredictable.

“The duration and severity of CBCs appear quite random due to the uncertain nature of Covid-19,” the economists led by Lu Ting added. “We believe markets have become overly optimistic about growth” in the second half.

On the upside, Chinese local governments are increasingly adept at maintaining factory and freight transport activity through lockdowns.

President Xi Jinping has urged officials to stick with Covid-zero, but last week struck a more conciliatory tone, telling officials to “reduce inconvenience in people’s everyday life,” while enforcing the policy.

“I expect that the Chinese government will respond to a rise in Covid cases with narrower, localised lockdowns, rather than the city-wide lockdowns used in April and May, in order to avoid severe disruptions to the gradual economic recovery now underway,” Andy Rothman, an investment strategist at Matthews Asia, said in a note.

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