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China’s economic growth slows to 0.4%, weakest in two years

People sell items from the trunks of their cars at a market in Shenyang, China. Coronavirus lockdowns are slowing the country's economy. (AFP/Getty Images)
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FUZHOU, China — China reported its worst economic performance in two years on Friday, adding to concerns about the prospect of a global recession, after coronavirus lockdowns in major cities hobbled trade and daily life.

Growth slowed to 0.4 percent in the three months that ended in June from a year earlier, the National Bureau of Statistics said, though independent economists said the world’s second-largest economy probably contracted over that period.

“It wasn’t easy to maintain positive economic growth” over the spring, Fu Linghui, spokesperson for the National Bureau of Statistics, said at a news conference Friday. “Looking at the next stage, the risk of stagflation in the global economy is rising.” Stagflation is a mix of slow growth, high unemployment and rising prices.

It was the worst quarterly GDP report since the first quarter of 2020, when China reported a 6.8 percent contraction as it began battling the coronavirus.

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The sharp slowdown is a painful setback for China, which last year was leading the pack of major economies in its rebound from the pandemic. Since then, countries such as the United States have largely reopened. But Beijing’s leaders have doubled down on their “zero covid” approach of stamping out every outbreak through draconian measures, arguing too many will die if China were to lift restrictions and reopen.

This strategy has become increasingly controversial and economically damaging. The arrival of more infectious variants this year has meant longer and more severe lockdowns are needed to bring outbreaks to heel. The two-month lockdown of China’s most populous city, Shanghai, was particularly devastating.

Some independent economists say that the official report of growth is rosier than reality. Logan Wright, director of China markets research at Rhodium Group, said declines in freight and passenger traffic, property sales, output of major construction materials and household consumption all paint a bleaker picture than the official numbers.

“We think the evidence is clear that China’s economy contracted significantly in the second quarter,” he said.

Last week, Chinese Premier Li Keqiang visited the coastal city of Fuzhou to meet with officials from across the southeastern industrial belt about how to stabilize the economy. According to the official Xinhua News Agency, Li said the situation was at a critical point and urged officials to steer the economy “back on track.”

Photographs in state media showed Li in meetings in Fuzhou where no one was wearing a mask, one of several maskless publicity appearances he has made recently. These have been interpreted by some as a show of support by Li toward a faster return to normalcy, even as his boss, Chinese President Xi Jinping, has declared the nation’s continued commitment to “zero covid.”

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The repeated lockdowns have laid low the economy over recent months, leaving many people unemployed and underemployed, especially in service industries. The jobless rate of people ages 16 to 24 in cities reached 19.3 percent in June, the highest since Beijing started to publish the measure in 2018.

In April, not a single automobile was sold in Shanghai, with the city’s 25 million residents confined to their homes.

“The Chinese economy is in a very bad shape now,” said Tianlei Huang, research fellow at the Peterson Institute for International Economics in Washington. “Consumer demand is very weak.”

Huang said he expects China to miss its target of 5.5 percent economic growth for the full year because of the severity of the lockdowns. About 4 percent will be more realistic, he said.

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“Even in the most optimistic scenario, China will not be able to achieve its growth target for the full year,” he said.

The situation is a far cry from a little more than a decade ago, when China was routinely posting growth close to or exceeding 10 percent.

The lockdowns have interrupted factory production, snarling supply chains and delaying the shipment of goods to the rest of the world. These supply problems have been a major driver of U.S. inflation, which has soared to 9.1 percent. Consumer prices in China are up only 2.5 percent because of depressed demand.

Shanghai started to reopen at the beginning of June, but the arrival of the BA.5 coronavirus variant is threatening new lockdowns. The northwestern city of Lanzhou has put four of its districts under a seven-day lockdown. Shanghai returned some housing complexes to lockdown, while ordering millions of people to be tested again.

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“The Chinese economy in the second half of 2022 still faces the uncertainty of periodic lockdowns in response to new covid breakouts,” said Shang-Jin Wei, a finance professor at Columbia University. “If a recession breaks out in the U.S. or Europe, it will add further difficulty to the Chinese growth.”

Huang said foreign investors have been “voting with their feet” by shifting production to other countries because of the economic uncertainty. “The recent very negative outlook of the foreign business community is probably not just some noise in the short term but may have some longer-term implications,” he said.

Meanwhile, there are signs of distress in China’s housing market. An increasing number of home buyers are refusing to pay mortgages on unfinished projects, Bloomberg News reported this week, citing financial researchers, a worrying sign for banks and for the ruling Communist Party ahead of leadership meetings in the fall.

Independent economists take China’s official data as a general gauge, though the precision of the figures is widely distrusted. Li, the premier, once called China’s figures “man-made” and “for reference only” during a private meeting, according to a U.S. diplomatic cable released by WikiLeaks.

Vic Chiang in Taipei, Taiwan, contributed to this report.