Covid continues to put pressure on China’s economy

China’s major industrial firms’ earnings shrank in the first 10 months of 2022, putting pressure on the government to boost support for sectors hurt by Covid-19 outbreaks and weak factory-gate prices.

Despite facing pressures brought about by the resurgence of Covid-19 outbreaks and slackening domestic and external demand, the economy is set to recover gradually in the coming months given the government’s targeted macro policy easing, analysts are predicting.

They say the country has the capacity to step up fiscal and monetary policy support to stabilize growth, including boosting infrastructure spending and cutting interest rates.

Recent data from the National Bureau of Statistics showed that profits made by industrial firms fell 3% year-on-year to about 6.98 trillion yuan ($974 billion) for the January-October period. Zhu Hong, a senior statistician with the bureau, said industrial profits were weighed down by renewed domestic Covid cases and weak factory-gate prices.

In October, China’s value-added industrial output grew 5% from a year earlier, while factory-gate inflation declined by 1.3% year-on-year.

Zhou Maohua, an analyst at China Everbright Bank, said the government’s support to ensure stable supplies and prices, and increase financial support for manufacturing, had all boosted corporate profitability.

During the first 10 months of 2022, profits recorded by firms supplying electricity, heat, gas and water grew by 15.5% after a 4.9% rise in the first nine months, while profits of equipment manufacturing enterprises rose by 3.2% on a yearly basis in the first 10 months after the 0.6% in the first nine months, Zhou said.

Lou Feipeng, an economist at the Postal Savings Bank of China, said “the economy will likely improve in the fourth quarter with the government’s stimulus policy measures taking effect gradually, despite pressure and challenges”.

Citing the latest move by central bank the People’s Bank of China to cut the reserve requirement ratio for banks, Lou said it marked a key move to boost financing of the wider economy.

The central bank recently announced that it would cut the reserve requirement ratio for financial institutions by 0.25 percentage point from 5 December 2022, which will release about 500 billion yuan in long-term funds.

 

Digital sector boosts China’s economy

As the industrial sector begins to bounce back, China’s digital economy continues to grow.

Figures show that the value of China’s digital economy hit 45.5 trillion yuan ($6.32 trillion) last year, some 39.8% of the nation’s GDP, according to Zhang Yuzhuo, vice-president of the China Association for Science and Technology.

Integration of the digital and real economies has been a top priority for China, Zhang said at the opening ceremony of the recent third World Digital Economy Forum in Chengdu, Sichuan province. He cited the fact that China has set up 153 state-level data centres for green and sustainable development.

It has also made efforts to expand international cooperation in the digital economy, including by signing memorandums of understanding with 16 countries on the Digital Silk Road initiative, he said.

In addition, China has established bilateral cooperation with 24 countries on Silk Road E-Commerce, a new international platform for economic cooperation.

“Through this forum, we hope to build more consensus, facilitate more pragmatic cooperation and jointly open a new chapter in the development of the global digital economy,” Zhang said.

As part of the Belt and Road Initiative (BRI), designed to improve China’s trade with the rest of the world, Chinese President Xi Jinping announced in May 2017 that big data would be integrated to create the ‘Digital Silk Road of the 21st century’.

The Digital Silk Road, also called the ‘Information Silk Road’, brings advanced IT infrastructure to BRI countries, such as broadband networks, e-commerce hubs and smart cities. The Digital Silk Road is driven by China’s tech giants, most notably Huawei and ZTE, who are able to deliver high-quality fibre optic cables at much lower costs to BRI signatory countries than their European and US counterparts.