China lockdowns hammer consumer spending to reveal zero-Covid toll

In a typical month, Wu, a 28-year-old office worker from Shanghai who says she usually goes shopping without hesitation, spends around Rmb12,000 ($1,780) in her daily life. But in April, when the city was shut down, it was only able to spend about a third of that amount.

“What I bought was mostly essential foods, like meat, eggs, milk and vegetables,” she said, adding that on one occasion she bought 90 eggs in one go. time. “Although my fridge is full, I am still anxious.”

Across China, where dozens of cities and hundreds of millions of people have been locked down to counter an outbreak of the Omicron variant of the coronavirus, the economy is facing a severe downturn. One reason is the inability of consumers like Wu to spend money.

Economic data released on Monday captured the magnitude of the hit from the strict measures for the first time, and the clearest impact was on consumption. Retail sales, an indicator of consumer activity, fell 11% year on year in April, its worst fall since the start of 2020. Industrial production, on the other hand, fell 3%.

For years, an increase in the purchasing power of the average Chinese consumer was supposed to help the economy move away from a growth model driven by exports and construction. But those long-term ambitions clash with the country’s zero Covid strategy, which has been prioritized by President Xi Jinping as he bids for an unprecedented third term in office.

China has already embarked on an easing of monetary policy to counter a crisis in the housing sector, and economists widely expect further stimulus this year. For policymakers, the deeper question is whether conventional monetary or fiscal stimulus can have the desired effect in an environment with such tight restrictions, especially given the uncertainty about how long the brakes will last during this epidemic and all others in the future.

“If we look at monetary data so far in April, despite all the stimulus that has already been put in place . . . loan growth was still relatively weak due to weak demand,” said Tommy Wu. , chief economist at consultancy Oxford Economics, said: “Clearly companies are not willing to take on more loans,” he added.

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Real estate market data illustrates the scale of the challenge in stimulating activity. The government cut the effective base mortgage rate for first-time home buyers from 4.6% to 4.4% last weekend. But in April, home sales by floor space fell 42% year on year – the biggest monthly drop since the virus first emerged two years ago.

In addition to easing mortgage rates, the People’s Bank of China made several cuts to a ratio that governs the amount of reserves held by banks. But central bank activity has been cautious.

“We expect the PBoC to refrain from putting in place stronger support unless it is convinced that this will have an impact on the real economy, that there will be a pass-through from these rates more down,” said Carlos Casanova, Asia economist at UBP. .

Retail sales data showed catering fell 23% in April, compared to a 10% decline in overall purchases of goods. In a breakdown of spending categories, only food, beverages, fuel and medicine were up year-over-year. Spending on autos fell 31.6%, the steepest of any category.

In Shanghai, which remains closed about seven weeks after a citywide lockdown was first imposed, not a single car was sold in April, according to the Shanghai Automobile Sales Association.

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Meanwhile, unemployment in April topped 6% for the first time since the start of 2020, adding further strain to consumers’ appetite for spending. Iris Pang, chief economist for Greater China at ING, suggested that state-owned companies would increase hiring. “Private businesses no longer have that capacity, after several rounds of shutdowns,” she said.

The government in March unveiled VAT refunds worth Rmb 1.5 billion, 90% of which is expected to go to small businesses by the end of the year. Tax policy measures in some regions have also included consumer vouchers, but Wu from Oxford Economics pointed out that the approach was limited because consumers needed to spend first.

“In that type of environment, people just aren’t going to spend,” he said. “You’ve got sentiment dampening Covid caution, you’ve got weak labor market conditions, you’ve got weak earnings prospects, so it’s very difficult to boost no matter what you do.”

Instead, the sheer scale of the government’s approach to Covid means that the pandemic response has become the dominant policy tool. But any relaxation of this strategy would be a political gamble for a government that has doubled down on its commitment to halt the spread of the virus and while many elderly citizens are unvaccinated.

“I think if there is an easing of lockdown measures in Shanghai, you will inevitably see a pickup in consumption in June, just due to pent-up demand,” Casanova said. But he doesn’t expect a “spending spree” even with policy easing.

Wu, who is still under control, made a list of things to buy for the opening of the city. But she figures any impulse spending will only last a day or two because she feels so “insecure.”

“My salary was cut by a third during the lockdown,” she said. “This financial insecurity will not go away easily.”

Additional reporting by Wang Xueqiao in Shanghai and Gloria Li in Hong Kong