In a typical month, Wu, a 28-year-old office worker from Shanghai who says she usually shops without hesitation, spends about Rmb12,000 ($1,780) in the course of her day-to-day life. But in April, when the city was locked down, she was only able to spend about a third of that amount.
“What I bought was mostly essential food such as meat, eggs, milk and vegetables,” she said, adding that on one occasion she purchased 90 eggs in one go. “Although my fridge is full, I’m 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 coronavirus, the economy is facing a severe slowdown. The inability of consumers such as Wu to spend money is one reason why.
Economic data released on Monday captured the depth of the hit from the strict measures for the first time, and the clearest impact was on consumption. Retail sales, a gauge of consumer activity, slumped 11 per cent year on year in April, its worst fall since early 2020. Industrial production, by contrast, dropped 3 per cent.
For years, a rise in the average Chinese consumer’s purchasing power was expected to help the economy transition away from an export and construction-driven growth model. But those long-term ambitions are clashing with the country’s zero-Covid strategy, which has been prioritised by President Xi Jinping as he bids for an unprecedented third term in power.
China has already embarked on a loosening of monetary policy to counter a property sector crisis, and economists widely expect further stimulus this year. For policymakers, the deeper question is whether conventional monetary or fiscal stimulus can have its desired effect in an environment with such severe restrictions, especially given uncertainty over how long the curbs will last during this outbreak and any others in the future.
“If we look at the monetary data so far in April, despite all the stimulus that has already been put in place . . . the loan growth was still relatively weak because of the slow demand,” said Tommy Wu, lead economist at consultancy Oxford Economics. “Obviously, businesses are not willing to take on more loans.”
Data in the real estate market illustrates the scale of the challenge to stimulate activity. The government cut the effective base rate for mortgage lending to first-time homebuyers from 4.6 per cent to 4.4 per cent last weekend. But in April, home sales by floor space fell 42 per cent year on year — the biggest fall in any month since the virus first emerged two years ago.
In addition to loosening mortgage rates, the People’s Bank of China has made several cuts to a ratio that governs the amount of reserves banks hold. But the central bank’s activity has been cautious.
“We expect that the PBoC will hold off from implementing stronger support unless they are confident that it will have an impact on the real economy, that there will be a pass-through of these lower rates,” said Carlos Casanova, Asia economist at UBP.
Retail sales data showed that catering dropped 23 per cent in April, compared with a 10 per cent fall in overall purchases of goods. Across a breakdown of spending categories, only food, drink, petroleum and medicine rose year on year. Automobile spending fell 31.6 per cent, the most of any category.
In Shanghai, which remains closed off roughly seven weeks after a citywide lockdown was first imposed, not a single car was sold in April, according to the Shanghai Automobile Sales Association.
Meanwhile, unemployment in April surpassed 6 per cent for the first time since early 2020, adding further strains to consumers’ appetite for spending. Iris Pang, chief economist for Greater China at ING, suggested that state-owned enterprises would increase hiring. “Private firms don’t have this capacity any more, after several cycles of lockdowns,” she said.
The government unveiled VAT tax refunds in March worth Rmb1.5tn, 90 per cent of which are expected to go to small businesses by the end of the year. Fiscal policy measures in some regions have also included consumption vouchers, but Oxford Economics’ Wu pointed out that the approach was limited because consumers needed to spend in the first place.
“In this type of environment people are just not going to spend,” he said. “You have Covid caution dampening sentiment, you have weak labour market conditions, you have weak income 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 the response to the pandemic has become the dominant policy tool. But any loosening of that strategy would be a political gamble for a government that has doubled down on its commitment to halting the spread of the virus and when many elderly citizens are unvaccinated.
“I think inevitably if there’s a relaxation of lockdown measures in Shanghai you will see a recovery in consumption in June, purely because of pent-up demand,” said Casanova. But he does not expect a “spending spree”, even with policy easing.
Wu, who is still under lockdown, has made a to-buy list for when the city opens up. But she feels that any impulsive spending will only last a day or two because she feels so “insecure”.
“My salary has been cut by a third during the lockdown,” she said. “This financial insecurity won’t fade away easily.”
Additional reporting by Wang Xueqiao in Shanghai and Gloria Li in Hong Kong