Every summer, Chinese tourists descend on the beach resorts in Sanya on Hainan Island, known as the Hawaii of China. Last weekend, the tourists got an unpleasant surprise when Chinese authorities abruptly locked down the entire city over an outbreak of the highly infectious BA.5 Omicron virus subvariant, trapping tens of thousands of visitors in their hotel rooms. More than a million residents in the city were affected by this latest example of China’s clumsily executed zero-COVID policy, which has taken a heavy toll on the nation’s economy and clouded its economic outlook.To get more
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The Chinese leadership has tweaked the lockdown policy, but only on the margin, such as earlier and narrower lockdowns combined with more targeted mass testing. Local authorities in China have continued to impose strict mobility restrictions during outbreaks. The social and economic costs of maintaining zero-COVID are mounting, deepening a general sense of uncertainty in the economy, hurting consumption and investment.
The Chinese economy is in its worst shape since early 2020 after barely expanding in the second quarter of 2022 from the same quarter in 2021. In quarter-over-quarter terms, the economy shrank by 2.6 percent. Given the meager growth in the first half of this year, it must grow at 7 to 8 percent in the second half to achieve the 5.5 percent full-year growth target, which is obviously out of reach. Acknowledging this challenge by implication, the recent Politburo meeting deemphasized the growth target and instead called for “striving to achieve the best possible growth results.” Some analysts agree that US House Speaker Nancy Pelosi’s visit to Taiwan gave Beijing an opportunity to distract the public’s attention from the lockdowns and economic challenges at home with all-out military exercises around Taiwan.
In a world of surging inflation, China’s price increases are moderate, reflecting poor consumer demand. To revive the economy, the government is resorting to its old playbook by spending more on infrastructure, which could have some positive impact. But the hard truth is that the lockdowns have done great damage to the economy, and greater infrastructure spending will do little to revive downstream industries and services that have been depressed by the lockdowns.
Unemployment—especially among migrant workers and young people—in recent months has been alarming. The months-long lockdowns in Shanghai and elsewhere crippled major migrant employers in services. Many migrant workers are in dire need, since no work means no income at all for most migrant workers who are not enrolled in social insurance programs. In the meantime, the youth unemployment rate hit a record high of 19.3 percent in June 2022, much worse than in previous graduation seasons. This year the job market is particularly competitive for young Chinese graduates given a record 10.8 million new college graduates are entering the labor market.
China’s private sector, which typically accounts for four-fifths of urban employment, has borne the brunt of China’s weak growth in the first half of this year and is providing fewer jobs. Presumably, the heightened regulatory uncertainty since last year also has played a role. Alibaba, Tencent, and Didi, among other Chinese tech giants, which are among China’s best-paying employers, are reportedly firing large number of employees as rising regulatory pressures hurt profitability. Beijing is now asking government agencies and state-owned enterprises to hire more young graduates, but job opportunities in the state sector are nowhere near enough. And the incentives that the government is providing to private-sector employers for hiring new workers is too limited to be effective.
