COVID-19 Restrictions are Easing in China, But Their Impact Could Last for Long

If there is one economy that stands way above the rest in Southeast Asia, it is that of China. It has achieved impressive growth during the past decades and surpassed the economy of Japan to become the second largest in the world (after that of the US).

This was the result of a large population, as well as massive industrialization, which combined led to lifting millions of people out of poverty. The Chinese market has become attractive for companies around the world, with its growing purchasing power. But recently, cracks have begun to appear in this formidable wall.

Multiple troubles at once for the Red Dragon

Troubles began to appear on the surface in 2019, as COVID-19 hit the city of Wuhan. Gradually this developed into a world-wide pandemic, but its first impact – and some say its harshest impact – was on China. Also, because of the zero-covid police implemented there , the impact lasted longer than in other areas around the world.

While Europe and the USA ended their COVID-restrictions a long time ago, China still implements harsh and extremely restrictive lockdowns every now and then. Just recently, another city with millions of people was put under tight lockdown – this time the southern city of Guangzhou. An easy finger on the quarantine trigger has a devastating effect on the national economy – and in the ability of investors to put their trust in it.

Data shows the Chinese economy slowing down

According to data published recently, retail sales fell by 0.5% in October from a year ago, which is the first decline since May. This was worse than expectations of 1% year-on-year growth in October for retail sales, and a growth of industrial production to 5.2% growth (which ended up being only 5%).

Experts at the global brokerage brand easymarkets, with whom we have discussed the Chinese economy, point to another very important figure. Fixed asset investment for the first 10 months of the year grew by 5.8% year on year. Investment in real estate declined, and investment in infrastructure picked up mildly, to 8.7% year-on-year for 2022 as of October.

Other culprits

Although Covid-19 restrictions did have a toll on the Chinese economy, it was not the only reason behind the slower growth. The Chinese government, led by the communist party, cracked down on tech companies, causing them to lose tens of billions of dollars in market valuation. Other restrictions were imposed on banks and other companies in the private sector, which also caused problems in the real estate development sector, or perhaps just revealed them.

Real estate development companies were borrowing a lot of money to develop property, expecting the property market to keep growing without a halt, given the growth in China. However, when the Chinese government imposed restrictions and demanded some financial control, the companies had to sell properties at a cheap price to meet their obligations. Property giants like Evergrande defaulted on their loans and their share prices began to fall. Other stocks were impacted as well, naturally. This threatened to reverberate in the entire global economy.

Conclusion

All of those troubles in the Chinese economy can be attributed in one way or another to mismanagement by the government. Their impact is likely to last for years, and even though COVID restrictions are easing, the troubles go deep. Unless structural issues in the economy are addressed, many years of slow growth can be expected, in China and countries that rely on it as an engine of growth.

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