Will China’s GDP growth fall below that of U.S.?

Mark O'Neill June 16, 2022 06:00

China aims to double the size of its economy and income per capita by 2035 and use its remarkable growth to achieve this. Since 1980, its annual GDP growth has averaged almost 10 per cent a year. It was 8.1 per cent last year.

But this year will its Zero-Covid policy and severe structural problems drive its growth below that of the U.S. for the first time since 1976? The U.S. Conference Board forecasts full-year growth of the U.S. economy at 2.3 percent in 2022 over the year before.

Joerg Wuttke, President of the EU Chamber of Commerce in China, said that the country’s GDP growth this year will be lower than four per cent. “We do not know how low. All signs indicate that politicians do not want to solve the problem, but to limit it. I have to assume that Zero-Covid will result in locking down this city and that city on a monthly basis, at least until the (Communist) Party Congress.”

A German business consultant in Hong Kong said he expected GDP growth this year of about two per cent. He blamed the Zero-Covid policy, severe disruptions in the industrial supply chain, weak retail demand, a crackdown on private enterprises and a sharp fall in revenue from land sales for local governments, their most important form of revenue.

Then there is the cost of the Zero-Covid policy itself. Soochow Securities estimates that a year’s testing of 505 million residents of China’s first and second-tier cities could exceed 1.7 trillion yuan, 1.5 per cent of the country’s GDP last year. Add the cost of personnel and you reach nearly two trillion yuan. Who will pay for this – the central or local governments or those being tested?

In the first four months of 2022, retail sales of consumer goods in China fell by 0.2 per cent year-on-year, with a drop of 11.1 per cent in April alone.

The World Bank is more bullish. In a forecast in early June, it said that China’s GDP growth this year will reach 4.3 per cent, “below estimates of potential growth, due to the lingering effects on the pandemic and weaker global demand … A prolonged war in Ukraine and intensifying geopolitical uncertainty could lead to a sharper-than-projected slowdown in the export growth of the Asia-Pacific region.”

Beijing is more optimistic. In the first quarter of 2022, China’s GDP grew by 4.8 per cent year-on-year. At a recent news conference, Fu Linghui, spokesman of the National Bureau of Statistics, said that, although some indicators contracted in April, the impact of COVD-19 would be temporary and the nation’s economy was on track to recovery.

On May 31, the State Council announced a package of 33 measures covering fiscal, financial, investment and industrial policies to revive its economy, adding it will inspect how provincial governments implement them.

In 2020, the first year of Covid, China’s GDP fell 6.8 per cent in the first quarter but rebounded to achieve the only positive growth of a major economy that year.

Small and medium enterprises (SMEs) have been badly hit by the epidemic. Xu Xiaolan, Vice Minister of Industry and Information Technology, told a news conference in May that, with complicated dynamics at home and abroad, many SMEs, particularly in the service sector, had experienced notable operational pressures. “Many are having trouble securing orders and worry about rising costs. It has been difficult for them to get financing, which they need because the recent COVID-19 resurgence has hit them hard.”

Individual economics and public health specialists have questioned the wisdom of the Zero-Covid policy and the severe toll it is taking on the economy. But, since it is a signature policy of President Xi Jinping, there is no organised public opposition.

Economists said that, before the start of Shanghai’s two-month lockdown, officials of the city government strongly argued against the measure. They said that the city was too important to the national economy and should be spared the draconian measures enforced in cities all over China.

But they were over-ruled and the lockdown implemented, at severe economic and personal cost. One city resident described this as “political struggle.” “The economic argument was not to impose such a wide lockdown, but the political argument over-ruled it.

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Mark O'Neill

A Hong Kong-based writer, teacher and speaker.