Status: 01.09.2021 2:58 p.m.
The rigid corona measures in China have their price: The negative economic signals from the People’s Republic are increasing. That doesn’t bode well for German companies and consumers either.
China was the first major economy to force its way back from the corona pandemic with all its lockdowns and restrictions. The latest economic signals from the Middle Kingdom are all the more worrying – not least for Germany, since China is the Federal Republic’s most important trading partner.
Shrinking instead of growing
In the middle of the week, the sentiment indicator recorded by the business magazine “Caixin” came in surprisingly weak. With a disappointing 49.2 points, it has also broken a sound barrier: Values below the so-called expansion threshold of 50 points indicate a decline in economic activity.
The day before, the state purchasing managers’ index for the service sector had risen below the 50 threshold – for the first time since February 2020, when the country was in a national lockdown.
High costs of the “Zero Covid” strategy
In search of the causes of the sudden onset of weakness in the Chinese economy, the focus is on the rigid anti-corona measures in the People’s Republic. China has a zero tolerance policy for the virus – with mass tests, lockdowns, travel restrictions and a strict quarantine system. With each further outbreak, the economic costs of this “zero covid” strategy increase.
“Above all, they hit the service sector hard, such as the areas of transport and logistics as well as tourism and gastronomy,” emphasizes Wan-Hsin Liu, China expert at the Kiel Institute for the World Economy (IfW) tagesschau.de.
Dr. Wan-Hsin Liu is a China expert at the Kiel Institute for the World Economy and coordinator of the Kiel Center for Globalization.
Image: Michael Stefan
The temporary closure of the second largest Chinese container port Ningbo – after only one corona case in the workforce – recently caused a sensation in this context.
Stronger economic headwind
“There is little doubt that the Chinese economy is about to cool down further as a result of the virus and political regulation,” says Commerzbank analyst Hao Zhou. The zero tolerance to virus infections will further dampen the economy. The Chinese economy is facing stronger headwinds.
Domestic consumption in particular is under pressure, as evidenced by weak purchasing manager data on the service sector. Auto sales slumped 15 percent year-on-year in the first three weeks of August. The bottom line is that the market will have to adjust to a clear drop in retail sales in August, emphasizes economist Hao Zhou.
A risk for the German economy
This is bad news for the German economy, since China has been the Federal Republic’s most important trading partner since 2015. IfW expert Liu explains that new bottlenecks in maritime transport, for example due to terminal closings in China, would also hit many German companies hard.
“Companies that buy electrical appliances, consumer goods and toys from China and want to sell them in Germany around Christmas time should be the first to feel the traffic bottlenecks.” In the second step, companies from other industries that are dependent on (pre-) products from China would also suffer from the delivery bottlenecks.
Just a passing phenomenon?
But there is also hope: “If the Corona measures work well in China, then the impact on the German economy should also be rather limited,” emphasizes economist Liu. Then the recent economic slowdown in China is “more of a temporary phenomenon, as was also observed in spring 2020”.
Other observers also assume that the economic situation is likely to improve again soon, since according to official data, China’s authorities have now brought the latest corona outbreak under control in many provinces.
“Since China has largely lifted the virus restrictions since the end of August, the economy should recover somewhat from September,” says Commerzbank economist Hao Zhou. “So unless there is another major virus outbreak, the economy is likely to have suffered only a temporary setback in the third quarter and recover in the fourth quarter.”
Major regulatory offensive
However, neither Chinese nor German companies should hope for stimulating economic measures on a large scale. The focus of Chinese economic policy is currently somewhere else: Beijing has been tightening its regulatory thumbscrews for months.
In its fight against indebtedness and excesses in the real estate sector as well as against the power of the tech corporations, Beijing is likely to continue to rely on measures to dampen the economy in the future. In July, steel production fell to its lowest level in 15 months after China’s government announced that it would produce less steel to protect the climate.
Beijing’s new regulatory frenzy – beyond the delta variant of the coronavirus – is currently probably the greatest risk for China’s economy and its trading partners.