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China’s COVID-zero controls have caused an economic slump not seen since the pandemic began

May 16, 2022, 9:09 AM UTC

For weeks, China’s COVID controls have closed factories, disrupted ports, restricted business operations and confined millions of people to their homes. While the restrictions have helped stamp down the country’s recent Omicron outbreaks, the harsh measures have clobbered China’s economy, too.

On Monday, economic data released by the National Bureau of Statistics (NBS) revealed just how badly China’s COVID-zero policy is hurting the economy.

According to the NBS, April retail sales fell by 11.1% compared to a year earlier, a greater drop than the 6.6% decline estimated by economists. Industrial output fell by 2.9% over the same period, instead of the slight increase economists predicted. Meanwhile, unemployment increased to 6.1% with youth joblessness hitting a record high.

“Generally speaking, the economic performance in April was greatly affected by COVID-19 pandemic,” the NBS said in a statement, noting that the impact of surging case numbers in China “obviously exceeded expectation.”

COVID restrictions in China’s economic centers, like the finance and shipping hub Shanghai, have thrown the economy into disarray. Residents in Shanghai have been confined to their homes since early March. Several other Chinese cities, including the capital of Beijing, have also implemented COVID restrictions to try to stamp out budding outbreaks.

China’s sector specific data reflects the downward pressures of China’s citywide lockdowns. According to the NBS, car sales fell 31.6% in April, while catering sales plunged 22.7% as millions of people remain trapped indoors.

China’s COVID response is also snarling international supply chains, with factories closing due to COVID outbreaks and parts shortages. Logistics companies have also been caught by COVID restrictions, leading to congestion at Shanghai’s port. 

While China’s production and retail sales have held up better in April than during the first COVID shock of 2020, “unemployment, property and the supply chain are even worse now vs. then”, wrote Larry Hu, Chief China Economist for Macquarie, in a note. 

“The disruption to economic activity could well extend into June,” writes Tommy Wu, Lead Economist at Oxford Economics, in a note, continuing that “the logistics recovery will likely take weeks.”

China’s bad economic data means that Beijing may find it difficult to achieve its growth target of 5.5% for the year.

To keep growth over 5%, Beijing “would need infrastructure investment to grow at 18% during 2022,” estimates Alicia García-Herrero, Chief Asia-Pacific Economist for Natixis. “From January to March, the average growth of infrastructure investment was 8%, April was only 3%, so an 18% growth rate for infrastructure is nearly off-limits.”

Shanghai may be turning a corner in its COVID outbreak. On Monday, Shanghai officials said that they had recorded no COVID cases outside of quarantined areas for the second day in a row. Officials had earlier pledged that three consecutive days of “societal COVID-zero” would start the city’s reopening process. Officials now hope the city can begin returning to normal by June 1.

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