China’s economy barely escaped contraction in the second quarter, according to analysts, as consumer and factory activity faltered in the face of repeated pandemic lockdowns. According to FT, the Chinese economy seems to be in a “desperate situation” with 8 points showed as follows:

1. Retail sales and industrial production rose but by much less than expected, while youth unemployment hit a record 19.9%. 

2. Growth in the third and fourth quarters will likely be stymied by Beijing’s zero-COVID strategy and a slowdown in exports. 

3. Chinese stocks also suffered from the disappointing data, shaking confidence in investors’ global outlook. 

4. Several Chinese cities are undergoing new or extended lockdowns and in Shanghai authorities are using drones to make sure that residents scan their health codes on a compulsory smartphone app — named “digital handcuffs” when they go into a building. 

 5. Weakening consumer confidence is manifest in poor sales of high-end goods, such as the market for second-hand luxury merchandise. 

6. Rising tensions are also negatively impacting the outlook for industries such as semiconductor manufacturing, while demand for chips used in smartphones and consumer electronics have stagnated. 

7. Chinese investors, dinged by market sell-offs and widespread defaults in the country’s flailing property market, are looking for other places to invest.

8. And if all this isn’t bad enough, inflation remains at a two-year high, according to data published last week. 

Lockdowns and strict quarantine regulations however remain the main drivers of the new pessimism. Xingdong Chen, an economist at BNP Paribas, “China is definitely in a very desperate situation.” He added, “The problem now is no effective demand. If you don’t allow people to come out and consume . . . there is no demand.” 

In order to stimulate the economy and deal with the real estate crisis, the central bank of China cut the benchmark lending rate for households and businesses again on Monday, August 22, and authorities plan to provide more liquidity support for developers.

The stock market’s reaction to China’s policy measures has been mostly negative. On Monday, stocks were volatile and the offshore yuan touched near two-year lows. On Wednesday, the Shanghai Composite Index closed down 1.86%, while Hong Kong’s Hang Seng Index closed down more than 1.2%.

Economists are also generally negative about the policies the CCP has rolled out so far. According to CNBC reports, on August 23, PineBridge Investments portfolio manager Mary Nicola said that Chinese authorities must take faster and more decisive measures to convince the market so that the economy will improve. 

Although the authorities have taken some measures, they have not had the desired effect.

Atilla Widnell, director and general manager of Navigate Commodities, said in a report on August 22, “The heat wave and the record high temperature (in China) still exist so that’s destroying construction steel demand. You still got COVID. People are still not on the streets consuming steel intensive goods.”

ACY Securities chief economist Clifford Bennett said the rate cut would have “zero impact” on the current direction of the economy and the real estate sector, with a slowdown in China already inevitable.

Will China’s market conditions get worse if the CCP sticks to its current strategy? Wee Khoon Chong, senior market strategist at Bank of New York Mellon in Hong Kong, sees a lot of risk. The link between policy mandates and Chinese asset prices has broken down, he said.

“Market and consumer confidence is critical to maintaining financial stability,” Chong was quoted as saying by Bloomberg. “In fact, restoring confidence is a pressing issue.”

“China is at a crossroads in terms of investor sentiment,” said François Savary, chief investment officer at Prime Partners SA, which reduced its exposure to China last week.

He continued, “Can China handle the current downturn? There are concerns that regulators are acting too little, too late.”

Sign up to receive our latest news!

By submitting this form, I agree to the terms.