China's economic activity in April collapses under Covid Zero policy

China’s economy is paying the price for the nation’s Covid Zero policy, with industrial output and consumer spending sliding to the worst levels since the pandemic began and analysts warning of no quick recovery.

Industrial output unexpectedly fell 2.9 per cent in April from a year ago, while retail sales contracted 11.1 per cent in the period, weaker than a projected 6.6 per cent drop. The unemployment rate climbed to 6.1 per cent and the youth jobless rate hit a record. Investors responded by selling everything from Chinese shares to US index futures and oil.

China’s economy has taken an enormous hit from the government’s stringent efforts to keep the virus at bay, with major cities like Shanghai locked down for several weeks and restrictions in many other places cutting into spending, shutting factories and blocking supply chains. 

The government has doubled down on its Covid Zero strategy, even though the high transmissibility of the omicron variant puts cities at greater risk of repeatedly locking down and reopening. The zero-tolerance approach has prompted criticism from businesses, fueled public frustration and has put Beijing’s ambitious full-year growth target of around 5.5 per cent further out of reach.

China’s main financial newspapers on Monday published a six-month-old speech by President Xi Jinping on the need to preserve jobs and shore up growth, a sign of greater urgency to bolster the economy. The surge in joblessness is of particular worry to the Communist Party ahead of a twice-a-decade leadership reshuffle later this year, when Xi is expected to secure a precedent-breaking third term.

“They prioritised zero-Covid over economic growth in April, but they want both for the whole year,” said Larry Hu, head of China economics at Macquarie Group. “After all, zero-Covid at the cost of surging unemployment is a hard sell politically, especially in such a year with significant political importance.”

Monday’s data suggests gross domestic product declined 0.68 per cent in April from a year ago, the first contraction since February 2020, according to estimates from Bloomberg Economics. Growth could weaken to below 2 per cent in the second quarter, according to UBS Group AG, while S&P Global Ratings predicted it could be as low as 0.5 per cent.   

With Shanghai taking the first steps toward reopening by allowing some shops to gradually resume operations, there’s optimism that last month’s data could mark the worst of the slump.  China’s benchmark CSI 300 stock index closed 0.8  per cent lower with healthcare and consumer staples shares being the worst performers. The onshore yuan weakened 0.1 per cent to 6.7957 per dollar as of 5:04 pm local time. Electricity generation fell 4.3 per cent in April from 2021.

Disruptions in China, the world’s factory, are worsening the global growth outlook and complicating the inflation picture. Supply chain snags have affected companies from Tesla  to Apple while export growth slowed last month to the weakest pace since June 2020.