mm hmm. Hello and welcome to day five things you need to know about the impact of the zero Covid policy on the chinese economy. I'm sona Ramesh from money. Mind I'm joined by Tommy wu lead china economist at capital Economics and Shirley, you senior fellow at the Ash center at the Harvard Kennedy school. Now there's been a stream of disappointing data out of china unemployment, rising retail sales down, we have factory activity down and new home prices also down all these signs of
an economic slowdown. I think china's
economy is
already in a
slowdown or actually
in a contraction, especially in april and perhaps in
May, I would
expect the prolonged shanghai
lockdown to have an impact
on shanghai itself,
but then also in other
parts of the
country, especially on the
coastal provinces in terms of how it's going to
affect industrial
production as well as exports because
of all the
prolonged restrictions, not
necessarily lockdowns
but restrictions in other parts of the
country. Household consumption and consumer
sentiment are
pretty weak at the moment.
So I would say that in
the second quarter
will perhaps see a quarter on
quarter contraction before
seeing things to improve. In
the second half,
the chinese economic slowdown is partly structural and partly cyclical of the three drivers of the chinese economic growth trade, particularly export is going to continue to retrench. In 2022 the easy money that has boosted the Western consumption in the past couple of years is basically gone. So the global demand for chinese goods will continue to weaken and a lot of the chinese export in the low to medium end of the global supply chain will continue to
shift towards asean. So we're going to see high export growth in south Korea. Vietnam substitution effects of the chinese products overseas. And that is the structural part. China's consumption growth has been stagnant on real terms in the past couple of years since the covid outbreak And now it's coupled with rising unemployment and particularly in the high tech high paying jobs. And so that is
not good for Chinese consumption. And we are continuing to see rising challenges of youth unemployment, particularly for college graduates. And so none of this is conducive for China's economic growth in 2022. Well that data is certainly not looking very conducive. So how bad could it get? I mean, are we looking at a recession here Tommy? Perhaps
the worst is behind us
now, shanghai is looking
to reopen
gradually in
june and barring another significant city wide lockdown in the second half. The chance of seeing a recession which means two quarters of quarterly contraction. It's pretty slim. So I would say that there will be a contraction in the second quarter but there should be a more significant recovery starting from the third quarter. If we measure recession using the western definition that is two consecutive quarters of negative GDP growth. I don't think
it's likely to happen in china. I don't think the chinese leadership will allow the scenario to happen. The first quarter performance is soft but it's so positive. China can always use monitoring in the
fiscal stimulus to
deliver some immediate economic impacts if it needs to. However, the key really to induce long term sustainable
economic growth for china
is to continue to innovate and continue to deepen reforms. The capital market reform is going to be a major area, including the full adaptation of the registration based I. P. O. System this year comparing to china's residential real estate market size. The chinese stock market size is
actually tiny. It speaks to china's urgent need to broaden and widen the capital market reform in order to continue to finance not only china's take rights but also the aging population and really the key is also to revitalize china's private sector Real estate supply chain consists of 20
percent of china's
GDP in china's real estate sales revenue in april declined 46.6% from a year ago. This scale of decline eclipses the worst of the real estate bubble burst in the United States between oh six and oh eight and so it
is a dire situation there. So it's really important to restore the confidence for not only the real estate developers, but also the local governments and most importantly the consumers and it's important to restore the confidence in china's rising big takes that have been under heavy crackdown since last year. We need to ensure that the tech entrepreneurs
continue to innovate innovation curve is long? It takes years to come to fruition for some of the R and D. So I think if china can continue to unleash the private sector vitality, the economic fundamentals will stay intact. A fundamental part of Chinese economic policy is the annual growth target and that's currently 5.5% for 2022. Can China meet the target this year. Shirley, what's your take? I think meeting the 5.5% GDP growth target is challenging
and it's highly uncertain at this point. One big variable is how quickly china can come out of the zero covid policy in another big variable is to what extent the global economy will suffer
from the Fed's
unprecedented quantitative tightening. And so china wishes to double its GDP over the next 15 years, which implies a 4.7% GDP growth per annum over the next decade and a half. And so there is still some room for a really bad year. If 2022 happens to be one and if that happens, I'm sure china will spare no efforts to deliver large scale stimulus. So, to sum up the chinese economy is feeling the full brunt of zero covid, things aren't
Expected to get better before the second half of the year. And that's gonna be a big challenge to hit that growth target of 5.5%. So if zero Covid is a problem for the
economy is the
solution to just well move away from zero Covid or do you think that this creates
a different set of
problems Tommy. I don't necessarily think that by abandoning the Zero Covid policy right now would actually be a good thing for china because of the
low vaccination rates among the elderly. Which means that by opening up right now perhaps the rate of infection and also the death rate will be very high and also it will be overwhelming the public health system at this moment because of the efficacy issue of the domestic vaccines, it will require three shots in order for the general population to be safe against the omicron variant, only about a little bit more than half of the
population have already had the booster shot. So I think a better timing to actually reopen fully is when everyone gets the booster shot and basically the vaccination rate among the elderly is high enough. And with those preconditions then china will be ready to reopen and it won't cause further disruption. The reason I said this is because even if you are open today with only half of the population having the booster shot.
This also means that if there's a you know a significant reopening moving away from zero Covid, there will still be lots of workers absent from work because they got infected, they got sick and they cannot go to work. So the impact on the supply change. It's still highly unpredictable. Even if we abandon the zero covid today within china. What
about the impact of china's slowdown on
ASia and the rest of the world? Is it all bad
news
with the supply disruptions within china particularly the logistics disruption because of the covid restrictions. It's not just within shanghai, say in april and may but it's also there are these highway controls in various parts of the country that is slowing the logistic recovery within china. So the logistics disruptions that's affecting china itself is going to have a spillover effect on its exports and its
exports to Asia. And also the global economy which means that a lot of the supply of intermediate goods from china will be affected. And also a lot of the supply of consumer goods out of china will be affected. So this will have a profound impact on ASia and global supply chain given china is playing an integral part of the global supply chain. It is a mixed bag with the initiation of the RCEP agreement to the regional
Comprehensive Economic Partnership. We're starting to see not only Asian integration but also a substitution of effects of the chinese production supply chain in ASIA and I think the semiconductor industry will
continue to be
concentrated in south Korea and Taiwan in Asia Vietnam will be well poised to replace quite a lot of the middle to low end of the chinese production capacity and India will rise as a regional tech economy and I think Singapore
will still very strongly
as an asian financial headquarters and the financial center china's slowdown will impact the global supply chain in a fundamental way. But it's not all bad stories for all asian
neighbors to sum up the chinese economy is feeling
the full brunt of
zero covid
restrictions and lockdowns and
things aren't expected
to get better before
the second half of the
year. So it's going to be a big challenge to meet that official growth target of 5.5%.
The slowdown will cause
headwinds for asian economies.
But there could
be new business opportunities for some. My thanks to my guest today Tommy will lead china economist at
capital Economics
and Shirley, you senior fellow
at the Ash center at the Harvard Kennedy school and that's the five things that you need to know about. The impact of zero covid on china's economy. Money. Mind airs every saturday at 10 30 PM on Mediacorp C N. A. You can also catch us online at CNN dot ASia on youtube. Mhm. Mhm