(Yicai Global) Aug. 4 -- China’s economy, the world’s second largest, may have already passed through its “darkest hour,” according to a recently published report by Yicai Research Institute.

In June, the economy was already recovering from the impact of Covid-19 outbreaks in the second quarter that were effectively under control at the end of May, statistics showed, according to the report by Yicai Global’s sister organization.

The challenges brought by the pandemic and the complex and constantly changing international situation are the main factors affecting China’s economic development. In the first six months of this year, it was severely impacted by Covid-19 flareups far beyond expectation.

China’s economic growth entered a cyclical slowdown in the first quarter due to last year’s high base. In the second quarter, outbreaks of the omicron variant hit a number of Chinese cities. Under strict pandemic-control measures, many regions, particularly the eastern megacity of Shanghai, had to halt economic activity.

As early as June, the resurgence of Covid came under control in Shanghai, Beijing, Changchun, the capital of northeastern Jilin province, and other areas, enabling them to get back to work and normal life. In Shanghai, production, consumption, and foreign trade activities all showed signs of recovery. The economy’s “darkest hour” may be behind it.

Gross domestic product growth slowed to 2.5 percent in the six months ended June 30 from 12.7 percent a year earlier, according to data from the National Bureau of Statistics, with investment, imports, and exports doing well, while consumption remained weak.

Due to fiscal policy effects and the impact of infrastructure investment that underpins the economy, total fixed-asset investment rose 6.1 percent in the first half from a year ago, exceeding the average 3.8 percent over the past four years.

Consumption growth slowed as consumers and businesses scaled back their economic activities due to Covid-19. Retail sales of consumer goods dipped 0.7 percent in the first half, dropping far below the four-year average. The property sector was also put to the test, as developers faced stricter supervision and home sales stopped amid the resurgence of Covid. The new construction and sales areas were both much smaller than in previous years.

Foreign trade held up. China’s supply chains remained stable amid domestic and external pressures. Overseas demand was robust, with first-half exports jumping 14.2 percent from a year earlier, despite last year’s high base.

Resilient Second Half

In the six month through Dec. 31, China’s economy will remain stable and rebound, despite the impact of ongoing Covid-19 restrictions. The uncertainty of the pandemic is what market players and policymakers need to consider in advance, according to Yicai Research Institute’s report.

Retail sales of consumer goods rose 3.1 percent in June year on year, snapping a three-month decline and picking up more quickly than after the pandemic struck in 2020. But in view of the challenge the virus may pose to the second half, consumption is unlikely to recover to its pre-Covid growth rate of 8.1 percent, but rather hover around 4 percent to 5 percent by year-end. For the service sectors such as retail, catering, transport, and tourism, consumption is likely to stay sluggish.

Following a series of stabilization policies, investment is expected to recover this half and better support economic growth under the relatively loose financial conditions resulting from cuts in the reserve requirement ratio and interest rates. Infrastructure investment will be an important factor in boosting the economy, but property investment still needs the support of stabilizing measures.

Central banks in the United States and Europe are cranking up monetary tightening in response to accelerating inflation, with the risk of an economic slump increasing. Yicai Research Institute's report predicts that exports, which greatly underpin China’s economic growth, may slow this half.

The core consumer price index is likely to drop further to between 0.7 percent and 0.9 percent. On the back of the local Covid-19 outbreaks and the ongoing Russia-Ukraine conflict, food and energy prices may lead to a further rise in the CPI, but generally, it will not exceed 3 percent. Supply and demand suggests the producer price index may be even lower in the second half of 2022.

China should relax some Covid-19 restrictions and promote consumption to boost its economic recovery in the second half, according to Yicai Research Institute.

The world's second-largest economy should loosen its nuclear acid testing policy and strict lockdown measures in regions rated as low risk, the Shanghai-based think tank wrote in its first-half report concerning China’s macroeconomy.

China should strengthen the research and development of Covid-19 vaccines. It should increase residents' awareness of the advantages of getting vaccinated, according to the report. The country needs to improve its public healthcare system and guarantee the livelihood of the elderly amid the increasingly aging society.

The nation's regional governments should expand their policies to stimulate consumption via measures such as tax breaks and subsidies to merchants who organize promotional events. The governments should encourage financial institutions to conduct consumer finance business and grant coupons for added consumption.

China should resolve risks in the real estate market and restore the market’s confidence as soon as possible. Yicai Research Institute suggested that local governments set up special bailout funds to prop up the sector with low confidence in some regions. The government should coordinate the distribution of rights and interests among companies, banks, and consumers to spur a virtuous circle and healthy growth in the property field.

China should relax some Covid-19 restrictions and promote consumption to boost its economic recovery in the second half, according to Yicai Research Institute.

The world's second-largest economy should loosen its nuclear acid testing policy and strict lockdown measures in regions rated as low risk, the Shanghai-based think tank wrote in its first-half report concerning China’s macroeconomy.  

China should strengthen the research and development of Covid-19 vaccines. It should increase residents' awareness of the advantages of getting vaccinated, according to the report. The country needs to improve its public healthcare system and guarantee the livelihood of the elderly amid the increasingly aging society.

The nation's regional governments should expand their policies to stimulate consumption via measures such as tax breaks and subsidies to merchants who organize promotional events. The governments should encourage financial institutions to conduct consumer finance business and grant coupons for added consumption.  

China should resolve risks in the real estate market and restore the market’s confidence as soon as possible. Yicai Research Institute suggested that local governments set up special bailout funds to prop up the sector with low confidence in some regions. The government should coordinate the distribution of rights and interests among companies, banks, and consumers to spur a virtuous circle and healthy growth in the property field.

Editors: Shi Yi, Xu Wei, Futura Costaglione, Emmi Laine