China's economic trend under the impact of the

epidemic

Make reference to: Judging from the overall situation in the first half of 2022, the
Chinese economy is facing great pressure under the influence of multiple domestic
and international factors. The biggest influence factor comes from internal policy
influence. Strict epidemic prevention and control policies, such as strict restrictions on
the movement of people within a certain region, have a great restrictive impact on
China's economy. So far, the economy grew 2.5 per cent in the first half of the year,
and 0.4 per cent in the second quarter, which is likely to be the slowest of the year. In
the second half of the year, if there is no more epidemic and control in China as there
was in the first half of the year, then the Chinese economy is expected to start
recovering.If the situation does not go smoothly and there are some local strict
epidemic control, then China's economy may experience an unusually slow annual
growth rate this year. In order to avoid economic stall speed, it is necessary to
moderately relax certain standards for epidemic prevention and control on the basis of
scientific research and assessment of the epidemic.
1. The State of China's Economy
Let's start with some basic data that characterizes the domestic economy. As can be
seen from the data of investment, industry, consumption and other sectors, the
downward pressure of the Chinese economy is increasing, the growth rate is slowing
down significantly, and even it has the trend of negative growth.

From the perspective of investment, in the first six months of this year, the national
fixed asset investment (excluding rural households) was 27,143 billion yuan, up by
6.1% year-on-year.The total investment in private fixed assets was 15,307.4 billion
yuan, up 3.5 percent year on year. On a month-on-month basis, investment in fixed
assets (excluding rural households) rose 0.95 per cent in June.The investment in the
primary industry was 682.7 billion yuan, up by 4.0 percent year on year;The
investment in the secondary industry was 8,469.4 billion yuan, up by 10.9 percent;The
investment in the tertiary industry was 17,990.9 billion yuan, up by 4.0 percent.1.
（ Bloomberg News. US, European Firms Rethink China Investment After
Lockdowns.[N/OL].(2022-05-17)[2022-05-22].https://www.bloomberg.com/news/
articles/2022-05-17/us-firms-in-china-may-reconsider-investment-after-lockdowns）

Shanghai has been hit hard by the COVID-19 outbreak this year.Fixed-asset
investment in Shanghai fell 21.2 per cent in the first five months of this year from a
year earlier.Among the three major investment sectors, investment in urban
infrastructure was down 41.3 percent from the same period last year;Industrial
investment fell 22.1 percent;Investment in real estate development fell 18.0
percent.Among the three major industries, the investment in the primary industry
decreased by 57.3% compared with the same period last year;Investment in the
secondary industry fell 22.1 percent;Investment in the tertiary industry decreased by
21.0%.
From the perspective of industrial production, in the first six months of this year,
industrial added value above designated size increased by 3.4% year-on-year (the
following growth rate is the real growth rate after deducting price factors).In June, the
value-added of industrial enterprises above designated size increased by 3.9% year-
on-year in real terms.From a month-on-month point of view, in June, the national
industrial added value above designated size increased by 0.84% compared with the
previous month.In May, the total industrial output of industrial enterprises above
designated size in Shanghai reached 234.124 billion yuan, down 27.6 percent from the
same month last year.
In the first half of this year, there were three major signs of risk in China's economy.
First, the resilience of the business community is being tested.In 2022, China's large,
medium and small enterprises are facing enormous pressure to survive.Although large
enterprises have more resources and a thick background, but in various fields,
including Tencent, Jingdong, Bytedance, Alibaba, Midea Group and many other large
enterprises are implementing scale downsizing, trying to strategic "slim down".
Second, the resilience of consumer groups is fractured. Since 2020, domestic
household income growth and consumption growth have remained sluggish, and
domestic consumption activities have contracted significantly due to the ongoing
epidemic and prevention and control. Especially when cities are locked down,
consumption activities that were diverse are relegated to basic subsistence
consumption, regardless of income level. Retail sales of consumer goods totaled
3,874.2 billion yuan in June, up 3.1 percent year on year, according to the National
Bureau of Statistics.In the first half of this year, the total retail sales of consumer
goods in China were 2,10432 billion yuan, down by 0.7% year-on-year.
Third, the fiscal resilience of local governments is being tested.In recent years, with
the increasing downward pressure on the economy, the increasing aging population
and the increasing demand for public services, the contradiction between government
revenue and expenditure has significantly increased.At the same time, the central
government is under increasing pressure to clear local debts, rectify debt expansion
and forestall financial risks, and the fiscal situation is constantly stretched.In 2022,
under the pressure of the pandemic and economic downturn, local fiscal revenue
reductions have been further highlighted by the implementation of large-scale tax
rebates and tax cuts.In addition, local fiscal downturn and expenditure compression
are bound to have an impact on the actual income of local civil servants, and in the
long run, the mood of civil servants will inevitably be affected.
The resilience of the Chinese economy is also being tested by its growth rate.The
5.5% growth target set at this year's NPC and CPPCC sessions has been challenged by
two new variables, the Russia-Ukraine conflict and the domestic epidemic.Several
domestic and foreign institutions have lowered their growth forecasts for China.
The resilience of the Chinese economy is facing an unprecedented test, which is
related to the international and domestic situation, but the biggest factor may still be
the impact of the domestic epidemic.Perhaps the most effective way to mitigate the
challenges facing China's economic resilience is to adjust its epidemic prevention and
control policies to balance the dual needs of epidemic prevention and control with
economic development.
2. The concrete embodiment of the recession
2.1 Influenced by economic downturn and other factors, the RMB exchange rate depreciates
rapidly
Since April 19, the RMB exchange rate has been falling against the US dollar. On
May 13, it even fell below the 6.8 level, hitting a new low since October 2020.There
are many different reasons behind the rapid depreciation of RMB exchange rate, but
according to researchers of Anbang Think Tank, the most important factor is the
domestic economic downturn and uncertain growth prospects under the influence of
the epidemic (as shown in Figure).

Although the current situation of RMB is conducive to avoiding investment currency

arbitrage, in the medium and long term, the long-term "external trend" of RMB
exchange rate is more complicated in the context of increased geopolitical risks, and it
is difficult to see a sharp rebound like that in 2021.Internally, researchers at the
Anbang think tank have repeatedly stressed maintaining a stable exchange rate and
stable economic fundamentals.It is fair to say that the recent increase in the
depreciation of the RMB exchange rate has a lot to do with the increasing downward
pressure on the Chinese economy and the contraction of demand under the pandemic,
which reflects the change in the expectation of RMB assets and economic growth.
2.2 Due to the impact of the epidemic, fiscal revenue has dropped significantly, increasing
the pressure on fiscal revenue and expenditure
According to the fiscal revenue and expenditure statistics for the first half of 2022
released by the Ministry of Finance, revenue in the national general public budget
reached 10.5221 trillion yuan, an increase of 3.3 percent after deducting tax credits
and rebates, and a decrease of 10.2 percent in natural terms.Of this total, revenue in
the central government's general public budget is expected to reach 4.766.3 trillion
yuan, an increase of 1.7% after deducting tax credits or rebates, and a decrease of
12.7% in natural terms.Revenue in local governments' general public budgets is
projected to be 5.7555.8 trillion yuan, an increase of 4.7% after deducting tax credits
and credits, and a decrease of 7.9% in natural terms.National tax revenue reached
8.556.4 trillion yuan, up 0.9 percent after deducting tax credits and rebates and down
14.8 percent in natural terms.Non-tax revenue was 1.965.7 trillion yuan, up 18 percent
over the same period of last year.
Budgetary revenue and expenditure of government-managed funds shows that in the
first half of this year, budgetary revenue of government-managed funds nationwide
totaled 2,796.8 trillion yuan, down 28.4 percent over the same period last
year.Budgetary revenue of central and local government-managed funds was 189.8
billion yuan, down 4.2% over the same period last year.Budgetary revenue of local
government-managed funds is projected to be 2,607 trillion yuan, down 29.7 percent
over the same period of last year. This figure includes 2,362.2 trillion yuan from the
sale of state-owned land-use rights, down 31.4 percent over the same period of last
year.Without taking into account the withholding of tax rebates, this year's
government revenue has declined considerably, as has the revenue of government-
managed funds. If we take into account the growth of government expenditures, the
pressure on government revenue and expenditure will continue to increase.
At the same time, in the case of national fiscal revenue decline, some local fiscal
revenue situation performance is more severe.In terms of cities, most of our top ten
cities experienced negative growth from January to April this year.In the first four
months of this year, Shenzhen, Nanjing, Suzhou, Hangzhou and Ningbo saw their
fiscal revenue drop by 12.6 percent, 15.1 percent, 10.4 percent, 3.46 percent and 3.8
percent, respectively.The monthly declines in April were 44 percent, 54.9 percent,
49.6 percent, 37 percent and 36.1 percent, respectively.The scale of the decline in
revenues in many places is surprising.
At present, the central government is concerned about the pressure on local
governments, especially on their basic finances. The solution is to raise funds by
carrying over funds and increasing profits, and to increase support for local
governments without increasing the fiscal deficit.Xu Hongcai, vice minister of
finance, said the central government's transfer payments to local governments will
reach 9.8 trillion yuan in 2022, an increase of nearly 1.5 trillion yuan or 18 percent
over the previous year.This includes 9 trillion yuan in normal transfer payments, an
increase of 8.4%, and 8.2 trillion yuan in general transfer payments, an increase of
8.7%.In addition to normal transfer payments, the government has also allocated 0.8
trillion yuan in transfer payments to support the implementation of tax and fee cuts at
the community level and to protect key areas of people's livelihood.
2.3 The impact of the epidemic on China's foreign trade and investment
Now, a new round of the epidemic has affected many parts of the country.In keeping
with the general policy of "dynamic zero elimination", local governments continued
the strict social epidemic prevention policies that had been successful in the past,
while strictly controlling the quarantine of inbound travelers.Overseas, many
countries have relaxed their quarantine policies.Obviously, this pandemic will have
some impact on China's economy.
According to the import and export data of the General Administration of Customs
(GAC), in the first half of 2022, the total value of China's foreign trade was 3,079.12
billion US dollars, up by 10.3% year-on-year.Among them, the export was US
$1732.28 billion, up by 14.2% year on year;China's imports reached US $1,346.84
billion, up 5.7% year on year.The trade surplus was $385.44 billion, compared with
$251.52 billion in the same period last year.From the data of the first half of the year,
exports still maintained double-digit growth, and the surplus increased by more than
50 percent year-on-year.In terms of monthly data, in June, the total value of our
foreign trade was 564.59 billion US dollars, up by 10.3% year on year.Among them,
the export was US $331.26 billion, up 17.9 percent year on year;Imports reached
233.32 billion U.S. dollars, up 1% year on year;The trade surplus was $97.94 billion,
compared with $51.53 billion in the same period last year.
Overall, export growth rebounded significantly in May and June, returning to the
double-digit range, while import growth also showed a significant improvement.But
researchers at the Anbang think tank say the recovery in exports has something to do
with foreign trade companies struggling to fill orders.Therefore, China's economic
recovery should not be overestimated.
In terms of export countries in the first half of this year, the year-on-year growth rates
of China's exports to the US, EU, ASEAN and Japan were 15.8%, 19.1%, 16.6% and
4.4%, respectively.From the perspective of import countries, the year-on-year growth
rates of China's imports to the US, EU, Japan, South Korea, ASEAN and New
Zealand in the first half of this year were 3.6%, -7.6%, -7.3%, 3.3%, 5.3% and 3.5%
respectively.
According to the statistics of the Ministry of Commerce and the State Administration
of Foreign Exchange (SAFE), from January to May 2022, China's foreign direct
investment in the whole industry was 368.48 billion yuan, down 2% (equivalent to
57.25 billion US dollars, down 1.3%) year-on-year.Among them, China's non-
financial direct investment in countries along the Belt and Road was US $52.71
billion, up 9.4% year on year and accounting for 18.4% of the total in the same
period, up by 1.2 percentage points year-on-year.
Against the backdrop of deteriorating external economic and geopolitical
environment, many countries have started to reduce their outbound investment, but
China maintained its outbound investment growth in the first quarter. This is a
difficult situation to maintain.However, since the lockdown in Shanghai and other
areas mainly occurred in April, it can be seen from the data that China's outbound
investment in April and May suffered obvious downward pressure, and the relevant
growth rate finally fell into the negative range in May.
(1.China's import and export data for the first four months of 2022.Source: General
Administration of Customs
2.Statistics of foreign economic cooperation.Source: Ministry of Commerce,
http://www.mofcom.gov.cn/article/tongjiziliao/dgzz/?3.
3.http://www.mofcom.gov.cn/article/tongjiziliao/dgzz/202205/20220503315114.shtml
2.4 The impact of COVID-19 on domestic transport, logistics and supply chains has been
severely disrupted
Domestic transport economy operation in the first quarter of this year is off to a
steady start.China's commercial cargo volume reached 11.29 billion tons, up 1.5%
year on year, and the growth rate was basically unchanged from the fourth quarter of
last year.Among them, 8.15 billion tons of highways were completed, up 0.4% year
on year;Waterways completed 1.93 billion tons, up 5.2% year on year;More than 948
million tons of goods were transported by rail, up 2.8% (including 333 million tons in
March, up 7.42%).
However, in terms of passenger transport, in the first quarter, the industry completed
commercial passenger volume of 1.54 billion person-times, down 22.5% year-on-
year.The country's 36 central cities handled 10.91 billion passenger trips, down 10.7
percent year on year.The number of passenger car trips on expressways was 4.63
billion, down 13.4 percent year on year.
In March, with the continued impact of the epidemic in China, some indicators of the
industry showed significant fluctuations, with the growth rate of that month falling by
more than 2 percentage points compared with that of January and February.With the
introduction of stricter traffic control measures in some Chinese cities, the
phenomenon of "increasing the number" and "beggar-thy-neighbor" has
intensified.According to data from an industry survey and monitoring platform, since
the fourth week of March, the national vehicle transportation volume dropped by
nearly 25%.
At the same time, the road freight volume has also declined significantly.Since late
March, the recovery rate of national vehicle cargo transportation (compared with the
peak season of the previous year) has begun to show a downward trend, from about
91% in the first half of March to about 65% in April.In April, the volume of road
freight was 2.959 billion tons, down 14.3 percent from the same period last year.
Seven provinces saw a decline of more than 30 percent in road freight volume, and 10
saw a decline of 10 percent to 30 percent.Shanghai and Jiangsu in the Yangtze River
Delta, the Beijing-Tianjin-Hebei region in the north, and Jilin in the northeast all saw
sharp declines.
The data picked up slightly in May.The national road freight volume was 3.257 billion
tons, down 4.6 percent year on year.One province saw a decline of more than 30% in
the volume of road freight, and seven saw a decline of 10% to 30%.In the same
period, the road freight volume of Jilin and Shanghai decreased by 30.1% and 28.3%
respectively, both improved from the previous month.
(1 https://news.sina.com.cn/c/2022-04-20/doc-imcwiwst3023022.shtml
(2 https://www.cnfin.com/kx/detail/20220517/3610098_1.html
(3 http://www.gov.cn/xinwen/2022-07/14/content_5700892.html
(4 http://finance.people.com.cn/n1/2022/0605/c1004-32438521.html )
2.5 The impact on foreign investment in China
(一)The actual utilization of foreign capital in April decreased significantly from the
previous month
Due to the impact of the epidemic prevention and control, foreign investment in China
declined in April, and foreign enterprises have been expressing their dissatisfaction
with the disruption of production and operation caused by relevant measures.The
survey results of multinational Chambers of Commerce in China show that adverse
factors from various aspects have significantly affected the intention and confidence
of foreign investors in China (see Figure ).

In the first five months of this year, the actual use of foreign capital nationwide
reached 564.2 billion yuan, up 17.3% year-on-year, equivalent to 87.77 billion US
dollars, up 22.6% year-on-year.But considering that from January to April this year,
the actual utilization of foreign capital accumulated about US $74.47 billion, an
increase of 26.1 percent year-on-year.According to this calculation, the actual
utilization of foreign capital in May was about 13.3 billion US dollars, a significant
decline from the growth rate of 21.23 billion US dollars in March.The result is not
surprising as foreign companies and chambers of commerce around the world have
recently expressed concern over China's quarantine policy and warned against future
foreign investment.
(二)European companies are moving their managers out of China while reducing
investment
Bettina Schoen-Behanzin, vice president of the European Chamber of Commerce in
China, said in May that while the chamber has authorized nearly 2,000 companies in
Shanghai to resume work, it is difficult for companies to involve workers who are
required to work in a closed loop.Businesses must therefore bear the additional costs
of catering, accommodation and security for these workers.On the other hand, supply
chains remain a problem, with most companies saying it is difficult to find truck
drivers to transport raw materials and finished products.
Against this backdrop, European companies' confidence in the Chinese economy has
fallen.In a survey of its member companies by the European Union Chamber of
Commerce in China, 60 percent of respondents said they had to lower their revenue
forecasts for 2022 because of quarantine policies.In the long term, about 80 percent of
companies noted that China has become "a less attractive investment destination"
given the epidemic prevention and control policies.About 23 percent of European
companies are considering shifting future investments to other markets.
(三) The American Chamber of Commerce in China expects investment to decline in
the next 3-5 years
American companies are facing similar problems.Amcham China conducted a quick
survey of 121 companies in late April.All respondents said their operations had been
affected, with the Shanghai area suffering the most.More than 15% of respondents
said their current operations in Shanghai were completely closed;About 60% of
American companies in other cities also report that they are running short of workers
and parts;In addition, 58 percent of respondents lowered their revenue forecasts for
2022.In terms of supply chains, 61 per cent of respondents complained of disruptions
to transport and shipping networks.While 68% said they were attempting a partial
restart, only 12% said China's recent efforts to stabilize supply chains had helped (see
chart).

Against this backdrop, about 52 percent of U.S. companies said they were reducing or
delaying investment plans.Michael Hart, president of the American Chamber of
Commerce in China, said, "Three to five years from now, we are likely to see a
decline in investment."
In addition, AmCham China expressed its opinion on travel restrictions in China.The
restrictions made them "very concerned" about trade and investment with China from
the United States and other countries.In the survey, 82 per cent of companies cited
prolonged isolation as a major concern, while 77 per cent said restrictions on travel to
China were themselves a major concern.
（ ① Christopher Pitchers. How is China’s ‘zero-COVID’ policy impacting
European businesses?.[N/OL].(2022-05-18)[2022-05-22]. https://www.
euronews.com/my-europe/2022/05/18/how-is-china-s-zero-covid-policy-impacting-
european-businesses
② Christopher Pitchers. How is China’s ‘zero-COVID’ policy impacting
European businesses?.[N/OL].(2022-05-18)[2022-05-22]. https://www.
euronews.com/my-europe/2022/05/18/how-is-china-s-zero-covid-policy-impacting-
european-businesses
③ Asia Financial. US Business Confidence in China Getting Worse, AmCham
Warns.[N/OL].(2022-05-09)[2022-05-22. https://www.asiafinancial.com/us-
business-confidence-in-china-getting-worse-amcham-warns）
In conclusion, strict quarantine measures, including lockdown, travel restrictions and
closed-loop production, are seriously affecting the production and profitability of
companies and factories in various countries, forcing them to move production chains
or management centers away from China and reduce investment plans.The apparent
slowdown in China's actual use of foreign investment in May shows that there is no
delay in restoring China's attractiveness to foreign investment.

3. Advice to prevent the blow of the epidemic

1.Implement flexible fiscal policies

There is no question that governments should be at the forefront and the fastest in responding to
the economic impact of COVID-19.Therefore, the key point of accurate policy implementation is
whether the government can properly adjust the investment structure.A more proactive fiscal
policy can better guide the rapid flow of private capital to the financial market, mainly focusing
on targets such as social investment, private investment and foreign investment.The recovery of
economic market needs a broader social investment path and more diverse channels. The
decrease of loan interest rate can greatly improve the financing speed of enterprises.At the same
time, the implementation of monetary policy to make the financial environment easier,
conducive to the economic market to achieve early recovery and growth.In addition, the
emergency measures triggered by the outbreak in a short period of time have increased a large
amount of fiscal expenditure, which urgently needs to be alleviated. Therefore, the issuance of
special government bonds and special bonds should be increased to encourage the introduction
of capital into social infrastructure.
2.We will develop multiple channels to encourage consumer spending
Consumption has always played a crucial role in the economic and market cycle. Therefore, in the
period of the outbreak of the novel coronavirus, the current focus should be on encouraging
household consumption to increase social liquidity.Given that low-income groups have a higher
marginal propensity to consume, cash subsidies to them can not only boost capital flow while
improving their daily lives, but also take a big step towards the goal of poverty alleviation as soon
as possible.For middle income groups with low marginal propensity to consume, consumption
vouchers should be issued to improve their willingness to consume and thus promote real
consumption.At the same time, another way to increase social liquidity is to reduce household
savings. The reduction of savings provides space for consumption growth, injects vitality into
depressed industries, and is conducive to the recovery of market economy as soon as
possible.The quickest and most direct way to reduce household savings is to lower the deposit
rate.In addition, the huge housing provident fund and social security fund can be used to
stimulate consumption. If the reduction and exemption of housing provident fund and social
security fund are increased, the application scope and conditions are expanded, the financial
pressure of residents can be eased to some extent and the consumption can be increased.
3.strengthen and stabilize employment
Employment is the cornerstone of national economic development and an important link in the
national market cycle. To comprehensively strengthen the employment first policy, we must first
focus on maintaining the existing employment structure and proportion of the consumer
market.During the epidemic period, the economy will inevitably suffer a downward trend. The
government should encourage and even require small and medium-sized enterprises to attract a
small part of the labor force as much as possible on the basis of maintaining the current labor
force level, so as to prevent mass unemployment in the society. Enterprises that actively respond
to the policy can be allowed to postpone the payment of social insurance.

In addition, the government should also be aware of the overall situation. The home quarantine
policy during the epidemic was forced to reduce the risk of infection, which greatly hindered the
daily business sales, work communication and education.A series of new business forms of online
services and the development of digital economy have become unstoppable and can indeed
make people's life and work more convenient, which should be more vigorously defended by the
government.

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