China’s Economic Growth Slows Sharply as Covid Policy Takes a Toll

· The economy expanded 0.4 percent from a year earlier in the second quarter

The humming economy has been replaced by high unemployment, a housing market in crisis and sluggish consumer spending in a year when Beijing is focused on projecting stability.

The Chinese economy grew this spring at its slowest rate since the beginning of the coronavirus pandemic, a sharp slowdown from a Covid-19 policy that continues to prompt widespread lockdowns and mass quarantines, bringing some business activity to a halt.

The National Bureau of Statistics said on Friday that the economy expanded 0.4 percent from a year earlier in the second quarter, the lowest rate of growth since the first three months of 2020. That was when the country effectively shut down to fight the early stages of the pandemic, its economy shrinking for the first time in 28 years.

The 2020 downturn was short-lived, with the Chinese economy recovering almost immediately. But the current outlook is not so promising. Unemployment is close to the highest levels on record. The housing market is still a mess, and small businesses are bearing the brunt of weakness in consumer spending.

The slowing economy poses a political problem for China, which is trying to project unwavering strength and stability in a year when it is scheduled to hold its Communist Party congress. Xi Jinping, the country’s leader, is expected to coast to another five-year term.

“China is the shoe that has never dropped in the global economy,” said Kenneth Rogoff, a professor of economics at Harvard University and a former chief economist for the International Monetary Fund. “China is no position to be the global engine of growth right now, and the long-term fundamentals point to much slower growth in the next decade.”

In May, Li Keqiang, China’s premier, called an emergency meeting and sounded the alarm about the need to gin up economic growth to more than 100,000 officials from businesses and local governments. The stark warning cast doubt about China’s ability to reach its earlier growth target of 5.5 percent for the year.

Measures to crack down on excessive borrowing by property developers have combined with the Covid restrictions to exacerbate a slowdown that could have global implications. Last month, Nike said revenue and profit fell in its most recent fiscal quarter, with sales to China falling 19 percent.

The most recent economic malaise hit in April and May, when Shanghai, China’s largest city, went into lockdown for nearly two months and the impact rippled through the economy. Office buildings were closed, and workers were ordered to remain at home. Throughout China, hundreds of millions of consumers were shut in — leaving stores, restaurants and service providers to carry on without customers.

Zheng Jingrong, an owner of a shop in Beijing selling imported handmade clothes, said she had typically sold 150 to 200 pieces of clothing in a month before the pandemic. In May, she sold 20. Her regular customers don’t come by anymore, she said, and people are generally reluctant to go out. Each year of the pandemic has been “worse than the year before,” Ms. Zheng said.

And the problem is not limited to her clothing shop. Ms. Zheng said more than 300 stores used to operate in the same neighborhood as her shop in Gulou, a maze of streets and alleyways once teeming with food stalls, cafes and bars. She estimated that 20 percent of those businesses were closing or had closed.

“Because China started booming and developing from the 1980s, its economy had always been going up,” said Ms. Zheng, who has run the shop for 15 years. “Now it’s obviously going down.”

Retail sales, an indicator of how much consumers are spending, fell 4.6 percent from a year earlier in April through June, according to the government.

And even as the economy improved in June, the threat of further mass quarantines may derail that nascent recovery. This week, the cities of Xi’an, Lanzhou and Haikou imposed partial lockdowns, setting restrictions on several million residents by closing nonessential businesses and enforcing mass testing.

The Japanese securities firm Nomura estimated that, as of Monday, 247 million people in 31 cities were under some kind of lockdown in China, covering about one-fifth of the national population and accounting for the equivalent of around $4.3 trillion in annual gross domestic product. The number of affected cities nearly tripled from a week earlier.

Beijing has urged local authorities to step up measures to ensure job stability during lockdowns. And yet, with so many small and medium-size businesses suffering financially, the government has struggled to get a handle on rising unemployment.

As of June, unemployment stood at 5.5 percent — an improvement from April and May but close to the highest level since China started reporting the figures in 2018. For job seekers ages 16 to 24, who include new college graduates, the unemployment rate was more than three times as high at 19.3 percent.

Dissatisfaction among people who bought homes before they were built is growing. According to state media, more home buyers are refusing to pay mortgages, upset about delays in construction as well as declines in home prices.