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Should We Be Concerned About China’s Sluggish Economic Growth?

China’s retail trade sales slowed in July, the latest in a series of reports for monthly indices that suggest a slower rate of economic growth could be in the works.

July’s retail sales rose 8.5 percent year-over-year, easing from June’s 12.1 percent gain. In addition to missing expectations—economists expected 11.5 percent growth—the July report represented the weakest increase since December.

Last year, China was the first country to rebound from the Covid-19 pandemic, and economic recovery quickly bounced back as restrictions eased. But growth could be waning, as evidenced by recent trends in the China’s monthly retail sales reports.

Retail sales in China have been slowing for several months. June’s 12.1 percent increase slipped from May’s 12.4 gain. But May’s numbers were down from April’s 17.7 percent rise, which in turn marked a sharp fall off from March’s 34.2 percent spike in retail sales.

July’s decline was attributed to moderating consumption due to Covid-19 outbreaks, although there were other impacts too, including localized flooding, according to the National Bureau of Statistics of China (NBS), which also cited “growing external uncertainties.”

Based on governmental policies implemented  by the Central Committee of the Communist Party of China (CPC), the NBS said those arrangements—implemented by the CPC, along with the State Council—resulted in economic growth that was in line with expectations and that a “basic equilibrium was maintained with regard to the balance of payments and the major macro indicators stayed within a reasonable range.”

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Consumers responded to the outbreaks and flooding by pulling back on purchases. Apparel sales for July grew just 7.5 percent, versus 12.8 percent growth in June. Cosmetic sales grew just 2.8 percent, down from the 13.5 percent gain in June. Jewelry sales rose 14.3 percent, a drop from the 26 percent uptick in sales the prior month.

Rising coronavirus infections have disrupted factory output and likely contributed to weak retail sales. While the economic malaise also has been compounded by summer flooding, there are other indicators pointing to possibly slower growth ahead.

Earlier this month, China’s Purchasing Manager Index (PMI) was 50.4 percent, a 0.5 percent dip from June, on a seasonally adjusted basis. PMI is a measure of the direction of economic trends in the manufacturing sector on upstream and downstream activity. According to NBS, China’s manufacturing industry as a whole “continued to expand, but the pace slowed down.” For the July 2021 year-over year period, NBS data shows manufacturing PMI was higher a year ago at 51.1 percent. PMI hit a high of 52.1 percent in November 2020 over that same period, and its high in 2021 was 51.9 percent in March. NBS’s July report also noted that the Production Index was 51.0 percent, a 0.9 percentage point decrease from June’s report and an indication that the expansion of manufacturing production had weakened.

In addition, the New Orders Index for July was down by 0.6 percent to 50.9 percent, a sign that the “growth of manufacturing market demand had slowed down,” NBS said.

Spiraling Covid case loads could further constrain near-term growth.

China has taken on a “zero tolerance” approach in its battle to fight Covid-19. Instant lockdowns and closed borders are part of the strategy to curtail further outbreaks, as well as mandatory testing.

Last week, the country shut a shipping terminal at the Ningbo-Zhoushan Port that serviced North America and Europe, putting strain on a supply chain that is already expected to see extensive pressure heading into the peak holiday shipping season. Ningbo is the world’s largest shipping port by cargo tonnage, and it is also considered the third-busiest port in the world by container traffic. China shut the Meidong terminal for an indeterminate period of time because of a confirmed case of Covid-19 involving a worker who reportedly was vaccinated. A bonded warehouse was also closed in the process. While the rest of Ningbo continues to operate, the terminal that was closed moves a significant amount of containers to North America and Europe.

Though 60 percent of China’s population has been vaccinated, there are concerns that the nation’s vaccines might not be as effective against the more contagious Delta variant.

Travel is barred from provinces rife with outbreaks, and all travelers to China are screened upon arrival and subject to a minimum 14-day quarantine. In addition, local city requirements can change daily. The Covid-related restrictions are also forcing airlines to cancel flights, contributing to delays in air freight and cargo pickups.