China’s Second-Quarter GDP Growth Plunges To Less Than 1% On Covid Hit

China’s economic growth slowed sharply to just 0.4% in the second quarter from a year ago, as Covid-related restrictions dealt a heavy blow to sectors ranging from consumption to real estate.

The grim performance, which was announced by the National Bureau of Statistics (NBS) on Friday, marks the weakest growth since the initial outbreak of the pandemic in 2020 and it also falls short of analysts’ expectations of around 1%. It included a 13.7% contraction in Shanghai’s gross domestic product and a 2.9% contraction for Beijing, as both cities installed widespread restrictions to stamp out the highly infectious Omicron variant.

Shanghai, in particular, went into a punishing two-month lockdown that stretched from April to June. Authorities brought the auto and financial hub of 25 million residents to a standstill, causing widespread anger amid food shortages and chaotic disruptions to logistics and production.

And the continued adherence to a zero-tolerance approach, which even today includes ongoing mass tests and partial lockdowns of cities such as Xi’an and Wuxi, is widely seen as putting China’s ambitious goal of 5.5% GDP growth for this year out of reach. New infections in Shanghai, meanwhile, has prompted fear of a return to lockdowns, as residents are urged to stockpile food and other daily essentials.

“President Xi Jinping in late June reaffirmed the goal of 5.5% growth in 2022. However, we do not think China can recover enough ground in the second half of the year,” Moody’s Analytics economist Heron Lim wrote in a research note, calling even his recent forecast of a 4.3% growth in 2022 optimistic.

Nomura economists led by Lu Ting, in the meantime, predicted year-on-year GDP growth of 4% for the third and fourth quarter. In a Friday research note, the analysts said headwinds remained strong. A global economic slowdown could hit China’s export sector, and zero-Covid policy will largely be in place for the rest of the year. “We believe markets have become overly optimistic about growth in H2,” the economists wrote.

Beijing has acknowledged the price the country is paying for its stringent policies. In its own release of second-quarter GDP data, NBS said the economic development faced “significantly increased adverse impacts” and “extreme complexities and difficulties. ” But it also pointed out that growth across industries from retail to industrial had started to recover in June, as a portion of the Covid-related restrictions were lifted.

But problems have emerged from elsewhere. Real estate, which some estimates say could account for as much as a quarter of China’s GDP, is suffering from a spiraling crisis as Beijing’s campaign to curb leverage and reduce sky-rocketing housing prices has crippled debt-laden developers from Evergrande to Shimao.

Now, after these cash-strapped companies have halted construction of some pre-sold apartment complexes, homebuyers across the country are refusing to pay mortgages unless work on the projects resumes. In a Thursday research note, Jefferies analysts led by Chen Shujin estimated that the delayed projects could lead to an as much as 388 billion yuan ($57.5 billion) increase in non-performing loans at Chinese banks.

The analysts called the level manageable, as funds tied to these apartment buildings account for only 1% of the total mortgage balance. But they predicted more “risk events” down the road due to factors including the growth slowdown, people’s expectation of less future income as well as shrinking property sales. In the central province of Henan, for example, a banking crisis emerged when customers discovered in April that they couldn’t withdraw their deposits totaling tens of billions of yuan from four rural banks. Protests by angry customers were seen on social media being violently put down, which stoked people’s anger even further.

Chinese authorities, for their part, said they’d first repay individuals with deposits of up to $7,400, as police scramble to investigate what they describe as a banking scam orchestrated by private investment firm Henan Xincaifu Group. Police said last week they had already taken some suspects into custody, and frozen funds and assets involved in this case. Authorities said they’d formulate a plan and pay the rest of the victims subject to further notice.