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China’s economy slows sharply as ‘zero COVID’ impacts activity | coronavirus pandemic

China’s economy slowed sharply in April as Beijing’s ultra-tight “Dynamic Zero COVID” strategy pushed consumption and industrial production to their lowest levels since early 2020.

The deteriorating economic picture comes as authorities have placed dozens of Chinese cities under full or partial lockdown, including the financial capital Shanghai, which has been home to tight restrictions on more than 25 million residents since late March.

With millions of Chinese confined to their homes, retail sales fell 11.1 percent year on year last month, significantly worse than March’s 3.5 percent drop, data from the National Bureau of Statistics showed on Monday .

The figure marks the biggest drop since March 2020.

As lockdowns forced factories to shut down and supply chains were disrupted, industrial production fell 2.9 percent year-on-year, compared with a 5.0 percent increase in March, the biggest drop since February 2020.

China’s labor market was also hit, with the nationwide unemployment rate rising to 6.1 percent in April from 5.8 percent, marking the highest rate since February 2020.

The poor numbers cast doubt on Beijing’s ability to meet its ambitious target of 5.5 percent growth in 2022 and are likely to fuel fears that the world’s second-largest economy could contract this quarter.

Limited aid to the economy

“The data could just be the beginning of the recession,” Alicia García-Herrero, chief economist for Asia-Pacific at Natixis in Hong Kong, told Al Jazeera. “With COVID restrictions continuing in May, the data will not be good this month either. We expect further bailouts to support private and small businesses, which are key employment hubs, as unemployment rose to 6.1 percent in April.”

García-Herrero said the poor economic data is putting pressure on the People’s Bank of China to cut interest rates to prop up growth.

“The likelihood of rate cuts has become much higher now,” she said. “If policymakers are going to do this, they need to do it quickly, before domestic inflation gets too high. But even then, I think these measures will only help the economy to a limited extent.”

García-Herrero said a second-quarter decline was inevitable without a clear exit from the “zero-COVID” policy.

Despite the mounting economic strain and official pledges to introduce measures to support industries and small businesses, Beijing has repeatedly doubled down on its controversial “zero-COVID” strategy, giving little hint of a plan to permanently end recurring lockdowns and border controls.

In a possible sign that draconian controls could continue in the longer term, China on Saturday withdrew from hosting the 2023 Asian Cup, which was scheduled for July next year.

Fixed investment, which Beijing is banking on to prop up the economy as the consumption and manufacturing sectors slow, rose 6.8 percent year-on-year in the first four months.

Tommy Wu, senior China economist at Oxford Economics in Hong Kong, said China’s economy could recover in the second half of the year provided authorities don’t impose Shanghai-style lockdowns on other major cities.

On Monday, Shanghai authorities said they intend to largely reopen the city and allow normal life to resume from June 1 after eliminating COVID cases outside of quarantine zones in 15 of its 16 counties.

“While the government has prioritized Covid containment, it is also determined to support the economy through more vigorous infrastructure spending and targeted monetary easing to support SMEs, manufacturing and real estate sectors, as well as infrastructure financing,” Wu said Monday in a note .

“Nevertheless, risks to the outlook are on the downside as the effectiveness of policy stimulus will depend largely on the magnitude of future Covid outbreaks and lockdowns.”

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