Beijing (Reuters) – The Chinese beef hotpot restaurant chain Baheli only makes a third of what it did before the COVID-19 pandemic, and it has no plans to grow again, even if the government stops all new infections.
Lin Haiping, the company’s founder, says that the problem is that consumers won’t quickly regain their trust because China’s stubborn pursuit of its “zero-COVID” strategy, which goes against the trend of living with the virus around the world, has turned their lives upside down.
Lin, who opened his first restaurant in 2008 in the southern city of Shantou and quickly grew it to almost 200 locations across China before having to close a quarter of them because of COVID, said, “All business plans are put on hold.”
“People think it’s hard to make money, so they tend to save it instead. It will take time for them to forget how bad it was. “
His comments reflect broader worries about a drop in consumer and business confidence in China as strict rules meant to stop COVID hurt a recovery in the world’s second-largest economy and slow global growth.
A Reuters poll shows that analysts expect China’s economy to grow by 4% this year. This is a level of growth that most countries would be jealous of, but it is slow by China’s own standards.
It would also miss Beijing’s official growth goal for the first time since 2015, when a stock market crash and capital flight hit China hard. This year, that goal is around 5.5 percent.
The worst effects of this slowdown are being felt in the private sector.
Consumer confidence is close to an all-time low, private investment slowed in the first half, and youth unemployment is at an all-time high of 19.3%. This has led to calls for the government to do more to help the economy right away.
But China’s already high economic imbalances are giving the Communist Party trouble as it prepares for a once-every-five-year congress in the fall, where President Xi Jinping is expected to win a third term as leader, which would be a first.
This year, hundreds of millions of Chinese people in dozens of cities had to deal with different COVID restrictions. In April and May, Shanghai was completely locked down. As the government plays “whack-a-mole” with COVID, many businesses have also closed, sometimes right after they were told they could reopen.
Shanghai-based Martin Wawra, CEO of Voith Turbo’s Mobility division, a German company that makes parts for commercial vehicles, said he needs to lay off workers to break even because COVID-caused logistical bottlenecks are making the trucking industry “suffer a lot.”
Private companies are also worried about a growing property crisis, rising borrowing costs in key export markets, rising geopolitical tensions, and a wide-ranging crackdown on the technology and private education sectors.
China’s real estate sector, which makes up about a quarter of its economy, has been hit by a string of defaults by developers, and a growing number of homebuyers are refusing to pay mortgages on stalled projects.
“China is going through a crisis of confidence,” said Rob Subbaraman, who is in charge of global macro research at Nomura.
“Households aren’t spending because they’re afraid of more lockdowns, potential homebuyers aren’t taking part in presales from developers who are short on cash, and private businesses aren’t making new investments because the outlook for consumption and exports is getting worse.”
FLIPPING PANCAKES
Many economists and investors think that Xi’s signature policies, like zero-COVID and the crackdown on “barbaric” growth in tech, education, and other sectors, are to blame for the bad economy.
Liu is 30 years old and works for an internet company. Since she started working there in 2018, her salary has tripled, and until recently, she was planning to buy a two-bedroom apartment.
“I was very sure about my income,” Liu said, only giving her last name so she could talk freely about her boss.
But, she said, her company laid off workers and cut pay last year because of the tech clampdown.
Liu wasn’t one of the people who were hurt, but she thought it would be smart to pay off the mortgage on her smaller home.
Some well-known Chinese economists are calling for the government to step back because of the private sector’s pessimism, which feeds on itself.
Yao Yang, dean of the National School of Development at Peking University, said in a mid-July online forum, “I don’t know if regulators and policymakers hear the voices of our companies.”
“Like flipping a pancake, they keep messing with the economy. How can entrepreneurs have confidence?“
Key Meetings
In the past few weeks, the government has given out a lot of tax cuts and subsidies, and investors are hoping to get more help from a meeting of the Politburo this week. The Politburo is the top Communist Party decision-making body.
More debt is likely to be issued to pay for infrastructure spending. This is on top of the trillions of yuan that have already been put into such projects this year. Debt is China’s main economic lubricant, but it is becoming more risky.
The ratio of China’s total debt to its gross domestic product (GDP) rose to 277.1% in the first quarter, which is 4.6 percentage points higher than where it was at the end of 2021.
“The most important thing is to manage expectations and restore trust,” a government adviser said on the condition of anonymity because the matter is so sensitive.
People who know a lot about policy say that Beijing may quietly accept slower growth without changing the goal.
Derek Scissors, a fellow at the American Enterprise Institute in Washington, D.C., says that policymakers could create a short “burst of borrowing,” but that the slow economy is not a threat to the government right now.
“A longer-term threat to Xi’s legitimacy is the question of what he has done as Party Secretary. “In the next five years, these questions will become clearer, but I doubt they will change anything at this year’s Party Congress,” he said.
