China’s zero-Covid policy goes far beyond social distancing and wearing masks in crowded places. It means closed highways and suspended flights, trains and bus services. China is taking tough action partly to forestall disruption to the Winter Olympics, which are less than three weeks away. That means trading much-needed economic growth for international prestige.
China cut its policy interest rate on Monday for the first time in nearly two years, highlighting the dire economic backdrop. The 10 basis point reduction in the one-year loans rate bucks the trend in a region where increases have been gaining speed.
It is a signal that the property downturn, power shortages and lockdowns are starting to inflict a bigger than expected hit on growth. China’s gross domestic product rose 4 per cent last quarter from a year earlier, its slowest pace in 18 months.
Interest rate cuts typically presage more active measures from Beijing. Expect the government to increase infrastructure spending sharply. It may also pressure banks to loosen lending requirements to struggling companies. Property developers, caught in the crossfire of the Evergrande crisis, would benefit most.
This creates a weaker outlook for banks, which are already wrestling with growing bad loans. The mainland-listed shares of China’s two largest banks — Industrial and Commercial Bank of China and China Construction Bank — have fallen a tenth in the past year, reflecting their growing burdens.
On the flipside, a revival of strong infrastructure spending should help companies such as Sany Heavy Industry, Jiangsu Hengli Hydraulic and Anhui Conch Cement all recover. Their share prices have dropped 30 per cent in the past year, as property sector woes weighed on sentiment.
Monday’s data releases also highlighted a key economic weakness. Chinese exports cannot be counted on to offset weak consumption caused by a zero-Covid policy. Overseas sales strength did lift its global trade surplus to a record $676bn last year. But exports accounted for just a fifth of 2021 GDP growth, while household consumption was two-thirds.
The Olympics are becoming an expensive exercise for China.
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