Analysis: Crisis of confidence is stifling China’s economic recovery

  • Consumers tighten their belts, private companies cut spending
  • The private sector is the most affected by the Chinese slowdown
  • Policy measures are likely to remain focused on infrastructure

BEIJING, July 26 (Reuters) – Chinese beef hot pot restaurant chain Baheli, which only made a third of its revenue before the COVID-19 pandemic, has no plans to resume expansion even if authorities bring new infections down to zero.

The problem, according to founder Lin Haiping, is that consumers would not regain their confidence in a hurry, as China’s dogged pursuit of its “zero-COVID” strategy, against a global trend of living with the virus, has upset their life.

“All business plans are postponed,” said Lin, who opened her first restaurant in 2008 in the southern city of Shantou and quickly expanded to nearly 200 outlets across China before moving on. close a quarter due to COVID.

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“People feel it is hard to earn money, they are more inclined to save. They will need time to forget the pain.”

His comments reflect broader concerns about a decline in consumer and business confidence in China as tough restrictions aimed at stamping out COVID undermine the recovery of the world’s second-largest economy and dampen global growth.

Analysts expect China to grow by 4% this year, according to a Reuters poll, a level that most countries envy but is slow by its own standards.

It would also miss Beijing’s official growth target – set this year at around 5.5% – for the first time since 2015, when China was hammered by a stock market crash and capital flight.

The private sector is bearing the brunt of this economic slowdown.

Consumer confidence is near record lows, private investment slowed in the first half of the year, and youth unemployment hit a record high of 19.3%, prompting calls for more urgent government stimulus. Read more

But already high economic imbalances are causing headaches for the ruling Communist Party as it prepares for a congress every five years this fall, where President Xi Jinping is set to secure an unprecedented third term in office.

Hundreds of millions of Chinese in dozens of cities have faced various COVID restrictions this year, culminating in Shanghai’s April-May full lockdown. A wide range of businesses have also closed, sometimes just after being allowed to reopen, as authorities play COVID molestation.

Shanghai-based Martin Wawra, CEO of the mobility division of Voith Turbo, a German commercial vehicle parts maker, said he had to lay off workers to break even as the trucking industry is “suffering a lot”. COVID-induced logistical bottlenecks.

Private companies are also worried about the evolving housing crisis, rising borrowing costs in major export markets, heightened geopolitical tensions and a sweeping crackdown on tech sectors. and private education.

China’s property sector, which accounts for around a quarter of its economy, has suffered a series of defaults from developers as a growing number of buyers refuse to pay mortgages on stalled projects. Read more

“China is facing a crisis of confidence,” said Rob Subbaraman, head of global macro research at Nomura.

“Households are hesitant to spend for fear of further closings, potential buyers have lost faith in pre-sales participation from cash-strapped developers, and private businesses are holding back new investment given the darkening outlook for consumption and of export”.


Many economists and investors link the economic malaise to Xi’s signature policies, from zero-COVID to regulatory crackdowns on “barbaric” growth in tech, education and other sectors.

Liu, 30, who works for an internet company, has seen his salary triple since joining in 2018 and had until recently planned to buy a two-bedroom apartment.

“I was very confident about my income,” Liu said, giving only her last name to speak freely about her employer.

But last year, her company responded to the tech crackdown by laying off workers and cutting wages, she said. Read more

Although she was not among those affected, Liu thought it would be prudent to pay off the mortgage on her current small house.

The self-reinforcing pessimism of the private sector is fueling calls from some prominent Chinese economists for the state to back down.

“I don’t know if regulators and policymakers are hearing the voice of our businesses,” Yao Yang, dean of Peking University’s National School of Development, said in an online forum in mid- July.

“They keep playing with the economy, like flipping a pancake. How can entrepreneurs be trusted?”


The government has rolled out a series of tax cuts and subsidies in recent weeks and investors are awaiting a meeting of the Politburo, a top Communist Party decision-making body, this week for more support. Read more

More debt is expected to be issued to finance infrastructure spending, on top of the trillions of yuan already funneled this year into such projects – China’s inescapable but increasingly risky economic lubricant.

China’s macroeconomic leverage ratio, measuring total debt to gross domestic product, hit 277.1% in the first quarter, 4.6 percentage points above end-2021 levels.

“Besides building political support, the most important task is to guide expectations and restore confidence,” said a government adviser on condition of anonymity due to the sensitivity of the subject.

Policy insiders say Beijing could quietly accept weaker growth without revising the target.

Derek Scissors, a fellow at the Washington-based American Enterprise Institute think tank, said policymakers could stage a brief “borrowing burst”, but the sluggish economy was not an immediate risk for the government.

“There is a longer-term threat to Xi’s legitimacy: what has he achieved as Party Secretary? These questions will sharpen in the next five years, but I doubt they will a difference at this year’s Party Congress,” he said.

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Additional reporting by Casey Hall, Yew Lun Tian and Beijing Newsroom; Editing by Marius Zaharia & Shri Navaratnam

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