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China’s economy contracts as Covid lockdowns curb business

The world’s second-largest economy shrank 2.6% in the second quarter as millions were confined to their homes amid outbreaks in Shanghai and other cities.
China's battle against COVID-19
People are tested for the coronavirus in Shanghai this month. The city of 25 million was locked down for two months this spring amid China’s worst outbreak since the start of the pandemic in 2020.Kyodo via AP
/ Source: Associated Press

BEIJING — China’s economy contracted sharply in the second quarter, official data showed Friday, highlighting the impact of extended lockdowns in Shanghai and other cities as the country sticks to its tough “zero-Covid” policies.

The world’s second-largest economy shrank 2.6% in the three months ending in June, compared with growth of 1.4 % from January to March. Compared with a year earlier, which can hide recent fluctuations, growth slid to a weak 0.4% from the earlier quarter’s 4.8%.

Growth for the first half of the year was 2.5% over a year earlier, one of the weakest levels in the past three decades, and most forecasters expect China to fail to hit its 5.5% growth target this year.

This spring China faced its biggest coronavirus outbreak since the 2020 start of the pandemic, driven by the highly transmissible omicron variant. Anti-virus controls shut down Shanghai, home to the world’s busiest port, and other industrial centers starting in late March, fueling concerns global trade and manufacturing might be disrupted. Millions of families were confined to their homes, depressing consumer spending.

Factories and offices were allowed to start reopening in May, but economists say it will be weeks or months before activity is back to normal. Economists and business groups say China’s trading partners will feel the impact of shipping disruptions over the next few months.

“The resurgence of the pandemic was effectively contained,” the statistics bureau said in a statement. “The national economy registered a stable recovery.”

China’s latest infection numbers are relatively low; on Thursday, the mainland reported 86 new locally transmitted cases.

The economic slowdown hurts China’s trading partners by depressing demand for imported oil, food and consumer goods and hampering shipments of products to foreign markets.

The government is promising tax refunds, free rent and other aid to get companies back on their feet. Forecasters say Beijing is using cautious, targeted stimulus instead of across-the-board spending, a strategy that will take longer to show results. Chinese leaders worry too much spending might push up politically sensitive housing costs or corporate debt they see as already dangerously high.

Retails sales were off 0.7% from a year earlier in the first half after plunging 11% in April.

Investment in factories, real estate and other fixed assets climbed 6.1%, reflecting efforts to stimulate growth by increasing spending on public works construction and ordering state-owned companies to spend more.

China rebounded quickly from the pandemic in 2020, but activity weakened as the government tightened controls on use of debt by its vast real estate industry, which supports millions of jobs. Economic growth slid due to a slump in construction and housing sales.

Investors are waiting to see what happens to one of China’s biggest developers, Evergrande Group. It has struggled since last year to avoid defaulting on $310 billion owed to banks and bondholders.