The Delta variant is just one of the clouds hanging over China’s economy

By Laura He, CNN Business

China’s economic recovery is slowing down — and it’s not just the spread of the Delta variant of Covid-19 that has economists and government officials on alert.

Chinese officials on Monday released new data on industrial production, investment and retail sales for July showing signs of weakness in the economy. Growth in industrial production was the slowest it has been in 11 months, rising by 6.4% from a year ago. Car production was slammed by the global shortage of semiconductors.

Growth in retail sales in July was the weakest it has been all year, while investment in fixed assets also missed economists’ expectations.

“The spread of the virus and natural disasters have affected the economy in some regions, and the economic recovery is still unstable and uneven,” said Fu Linghui, a spokesman for the National Bureau of Statistics (NBS), at a press conference in Beijing on Monday. Along with the latest coronavirus outbreak, catastrophic flooding swept through central China last month, killing more than 300 people. Widespread damage and disruption has also caused direct economic losses totaling nearly $21 billion, according to government statistics released this month.

The flareup of Covid-19 likely contributed to at least some of the slowdown in retail sales toward the end of July, according to Julian Evans-Pritchard, senior China economist for Capital Economics.

The outbreak in China has spread to more than half of the country’s 34 provinces and regions, and led to more than a thousand confirmed cases. Authorities have taken dramatic measures to stamp out new infections, including isolating cities, canceling flights and closing down entertainment venues.

The unemployment rate for young people worsened in July to 16.2%, according to government data. That’s the highest rate in a year.

The virus outbreak, along with disruptions caused by severe flooding in central China, “appears to have disrupted the hiring of fresh graduates somewhat,” Evans-Pritchard added in a Monday research note.

Fu of the NBS said a few factors are contributing to pressure on the labor market. More than 9 million new college graduates are seeking jobs in China this year. And because of the pandemic, many students who were studying overseas have returned home to look for work.

Persistent supply bottlenecks and tighter credit conditions have exacerbated concerns about economic growth. Infrastructure spending was especially weak as authorities withdrew fiscal support.

“Tighter restrictions on borrowing among developers appear to be taking some of the heat out of property investment,” Evans-Pritchard added.

Car manufacturing was the worst performer among major industrial sectors, contracting 8.5% in July compared to a year earlier. That was mainly because of the ongoing chip shortage, according to Iris Pang, chief economist for Greater China at ING.

Production of computers, telecommunications equipment and other electronic products are also likely to slow down in the coming months because of the chip supply issues, Pang added.

There are more challenges ahead for the Chinese economy. Last week, authorities shut down a terminal in Ningbo-Zhoushan port — the world’s third largest container port — after a dock worker tested positive for Covid. The port handles goods that would fill around 78,000 20-foot containers every day, and the terminal that closed accounts for around a fifth of the port’s volume.

“This will negatively affect import and export activity around the area of Shanghai,” she said. “We expect terminal congestion might take several months to clear.”

The recent regulatory crackdown on tech, education and other sectors could also “curtail the growth” for tech firms in the short term, Pang added.

Evans-Pritchard, meanwhile, said he expected spending to pick back up as the virus is brought back under control and restrictions are lifted in China.

But he anticipated the slowdown elsewhere to deepen, as the People’s Bank of China is likely going to continue keeping credit growth in check.

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