China's economic recovery has become a political issue

China's July economic data were released on 15 August and almost all key indicators are flashing red, to the surprise of many.

The Chinese economy was dealt a severe blow in the first half of the year, as the Covid-19 pandemic trapped Shanghai, Beijing, Jilin and other areas in lockdowns or semi-lockdowns. In the first six months of the year, China's GDP grew by 2.5% year-on-year, with the second quarter's GDP growing only 0.4% year-on-year.　　

The economy was expected to gain a firmer footing and record better growth following the recovery of various Chinese regions from the previous round of Covid-19 outbreaks. But the second half of the year got off to a bad start, with industrial production and consumption recovering below expectations.　　

China's National Bureau of Statistics reported that industrial profits in July rose by 3.8%, a decrease compared with 3.9% in June. Retail sales growth in July also declined to 2.7% year-on-year, down from 3.1% in June.

China's real estate sector, an important pillar for economic growth, is still in a slump despite the introduction of multiple stimulus policies. In July, property investment fell 12.3% year-on-year, the biggest drop recorded this year.

Meanwhile, the employment situation has left more cause for worry. While Chinese officials have repeatedly emphasised the importance of stabilising employment over the past few months, the situation remains bleak. In July, the surveyed unemployment rate for youths aged between 16 and 24 climbed to a record 19.9%, meaning one in every five Chinese youths is unemployed. 　　

China's deepened economic slowdown has cast a shadow on the Chinese Communist Party's major political year. On 15 August, the People's Bank of China (PBOC) unexpectedly announced interest rate cuts on its medium-term lending facility loans and reverse repos by ten basis points to boost credit expansion and support the sluggish economy. However, it still could not curb the economic downturn or alleviate market pessimism. Lu Ting, chief China economist at Nomura Holdings Inc., pointed out in a report that the rate cut was "too little, too late".

Some analysts also said that the problem does not lie in the lack of money but in the fact that people and enterprises are not willing to spend or invest. This sentiment was also reflected in the key financial data released by the PBOC on 12 August.

As of July, while China's M2 money supply maintained growth of over 10%, RMB loans and total social financing declined significantly. Chinese banks extended 679 billion RMB (US$101 billion) in new RMB loans in July, a decrease of 404.2 billion RMB compared with the same period last year, and a precipitous fall from the 2.81 trillion RMB in June.

Total social financing also dropped to 756.1 billion RMB in July, a decline of 319.1 billion RMB compared with last year and 4.41 trillion RMB compared with June. Essentially, the PBOC is pumping money, but nobody seems to want it.　

In the early stages of the Covid-19 pandemic, the Chinese economy had shown a stellar performance. The Chinese economy was even described as juan (卷, a popular internet buzzword meaning to be the best in everything). Now, the world's second largest economy is increasingly showing signs of fatigue and can no longer juan. While the economic slowdown is a global phenomenon, the challenges of the Chinese economy are filled with "uniquely Chinese" dilemmas. 　　

Firstly, the biggest problem the Chinese economy faces is the dilemma between saving the economy and fighting the pandemic. Recurrent Covid-19 outbreaks and stringent zero-Covid measures that show no signs of easing have severely disrupted social and economic life. Since August, a new round of Covid-19 outbreaks has broken out in Hainan, Tibet, Xinjiang and other summer vacation destinations. Whether zero-Covid can be achieved has been called into question again.

Chinese officials believe that achieving zero-Covid is a political achievement, and they worry that relaxing the strict anti-epidemic measures will result in widespread infection. However, uncertainties brought about by anti-Covid measures have hurt the economy, becoming a stumbling block to another political achievement - economic growth.

Following the Covid-19 outbreak in Hainan, a reporter stranded in Sanya during a family trip wrote, "Before the zero-Covid policy is removed, try not to travel around China." Avoiding travel and spending has become the norm. If China continues to juan, or try to be the best, in containing the pandemic, the Chinese economy may "lie flat" (躺平).

Secondly, the bursting real estate bubble is another factor exacerbating China's economic woes. How the current property crisis can be solved is also another challenging question, whereby the recovery of the housing market is critical for both the overall economy and local government finances.

The outside world is also worried that the recent wave of mortgage boycotts would impact China's financial stability. But officials also have to handle the property crisis carefully to make sure that the housing market will not return to its old ways of disorderly development characterised by spiralling house prices and overleveraging by developers. Ironically, while the officials' worry is clear to the market, it is still difficult to regain confidence in the property sector.

In addition, China must urgently revitalise the private sector amid the economic downturn. But it remains uncertain whether the Chinese higher-ups are completely comfortable with private enterprises. Authorities have cracked down on private enterprises in the internet and education sectors over the past two years, dealing a big blow to their growth. It remains to be seen whether Beijing can restore the confidence of the private enterprises amid the slowing economy, given that relaxing regulations is at odds with the authorities' habitual tight control over various industries.

China's economic woes are mixed with numerous political factors and need to be resolved through political means, which could prove to be the biggest challenge. But one thing cannot be ignored: an economy that "lies flat" ultimately becomes a political problem.

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