Covid Disruptions Weaken Key Sectors, Leading to Economic Contraction
China’s economy showed signs of contraction in the fourth quarter of 2022, as disruptions caused by Covid-19 led to significant weakening in manufacturing, services, and property sectors, according to a private survey.
The China Beige Book International (CBBI) reported on January 2 that key indicators such as profits, sales, and employment at manufacturing and services companies saw a sharp decline in the final quarter of 2022 compared to both the previous quarter and the same period the year before. This survey, which included responses from 4,354 businesses, highlighted a concerning downturn in these sectors.
The property market also experienced a major decline, with transaction volumes and prices plummeting to near-record lows. The data suggests that China’s gross domestic product (GDP) likely shrank in real terms in the fourth quarter of 2022, with only 2 per cent growth recorded for the entire year.
Bloomberg economists had predicted a slowdown, forecasting a 2.9 per cent growth rate in the fourth quarter, culminating in 3 per cent growth for 2022. However, with the ongoing Covid crisis, weakening investment, and poor new orders, recovery in the first quarter of 2023 appears increasingly unlikely.
The sudden lifting of Covid restrictions in early December triggered a sharp rise in infections, further clouding the outlook for China’s economy. While some economists anticipate a potential rebound once infection waves subside, the rapid reopening is expected to disrupt economic activity in the first quarter.
Despite early signs of recovery in cities like Beijing, where infection rates have likely peaked, businesses continued to face significant challenges in the final quarter of 2022. Notably, a higher proportion of loans were sourced from non-bank lenders—46 per cent in the last quarter of 2022, up from 33 per cent in the previous quarter. This surge in shadow banking suggests companies are struggling to access credit from traditional banks, with borrowing costs rising to their highest levels in over a decade.
