China growth falls to two-year low

BEIJING — China logged its slowest economic growth since the initial COVID outbreak on Friday, expanding just 0.4 per cent in the second quarter with lockdowns and property market weakness pushing the government's target further out of reach.

Beijing has dug its heels in on a zero-COVID policy of stamping out virus clusters with snap lockdowns and long quarantines, but this has battered businesses and kept consumers jittery.

The slowdown comes after China's biggest city Shanghai was sealed off for two months as it battled a virus resurgence, tangling supply chains and forcing factories to halt operations.

"Domestically, the impact of the epidemic is lingering," National Bureau of Statistics (NBS) spokesman Fu Linghui said on Friday, noting shrinking demand and disrupted supplies.

"The risk of stagflation in the world economy is rising" also, he told reporters, adding that external uncertainties were growing.

Economic expansion for the April-June period in the world's second-largest economy was also down 2.6 per cent from the previous quarter, the NBS said.

China has only logged a gross domestic product (GDP) contraction once in recent decades, and analysts expect the latest reading will drag further on full-year growth.

Still, industrial production rose 3.9 per cent on-year in June, up from 0.7 per cent in May as COVID controls eased, while retail sales picked up 3.1 per cent after plummeting 6.7 per cent the month before, in what analysts called an encouraging sign.

The economy is "on track for a slow recovery", said Zhiwei Zhang of Pinpoint Asset Management.

"Nonetheless, economic growth is still much lower than its potential, as the fear of COVID outbreaks continues to hurt consumer and corporate sentiment," he added in a note.

The urban unemployment rate ticked down to 5.5 per cent in June, NBS data showed.

But the figure for those aged 16 to 24 was significantly higher at 19.3 per cent, adding to challenges in a year with a record number of college graduates.

In Shanghai, where GDP plunged 13.7 per cent in the second quarter, the jobless rate stood at 12.5 per cent.

The weak figures could give room for authorities to roll out stimulus.

"Fiscal stimulus will continue to do the heavy lifting before consumption demand fully recovers," said Chaoping Zhu of J.P. Morgan Asset Management.

Zhu added that the central bank is expected to maintain low rates to support government spending and the property market.

'Hard to square' 

Economists have long questioned the accuracy of official Chinese data, suspecting that figures are massaged for political purposes.

China's second quarter growth is "hard to square with the large hit to activity from lockdowns", said Julian Evans-Pritchard, senior China economist at Capital Economics.

"Even accounting for June's strength, the data are consistent with negative year-on-year growth last quarter," he added.

The data comes at a time of mounting challenges in China's key real estate sector — which by some estimates accounts for a quarter of gross domestic product — with weak home sales in recent months. 

A growing number of homebuyers are also refusing to pay their mortgages over worries their properties will not be built on time.

"We remain cautious on growth outlook in the second half, as spread of the much more infectious Omicron variant across the country could trigger another round of widespread lockdowns," Nomura Chief China Economist Ting Lu said.

Homebuyers halting mortgage repayments could also "result in a vicious cycle in the property sector, and a likely synchronised global slowdown will eventually hit the export sector", he added.

The news piles pressure on the Communist Party's leadership as it gears up for its 20th Congress, at which President Xi Jinping is expected to be handed a third term.

Analysts say it is unlikely the official target of around 5.5 per cent growth this year can be attained, given that it will require a huge acceleration in the second half.