The delta variant has hit China’s economy hard and now a real estate crisis looms

(CNN) – The drastic measures taken by China to contain the coronavirus This summer they have taken a toll on the confidence of the country’s consumers and are fueling concern about the strength of the second economy in the world.

Retail sales struggled in August, rising just 2.5% compared to the previous year, according to government statistics released Wednesday. This figure is much weaker than expected and represents a drastic slowdown compared to the 8.5% increase registered in July.

Chinese authorities attributed the slower growth to COVID-19 outbreaks and flooding, which prevented people from traveling and caused them to delay “spending summer vacations,” according to Fu Linghui, a spokesperson for the National Statistical Office. who spoke at a press conference in Beijing on Wednesday.

The costs of a “zero covid-19” strategy

Industrial production increased 5.3% in August from a year earlier, also slower than in July and the slowest growth generated by Chinese factories in a year.

Investment in urban areas, on the other hand, increased by 8.9% in the period from January to August, below the 10.3% in the first seven months of the year.

The data released this Wednesday is the starkest sample yet of how much the measures the government took to curb an outbreak of the delta variant this summer have affected the economy. To prevent new infections, China has applied an aggressive “zero covid-19” strategy, closing cities, canceling flights and suspending some port operations.

The approach worked to get the virus back under control, albeit at the cost of economic activity.

But the Chinese economy also has to deal with other problems, such as the housing sector crisis.

Threats to the real estate sector grow

New home projects, measured by area, fell 3.2% during the first eight months of the year.

“The headwinds in real estate appear to be intensifying,” Julian Evans-Pritchard, Capital Economics chief economist for China, wrote in a research report on Wednesday. He added that government restrictions on lending among real estate developers are putting pressure on the sector.

Recently, the liquidity crisis of the Chinese real estate giant Evergrande It has worsened significantly, and the company has warned that it could default on its huge debts as it struggles to cut costs or find buyers for some of its assets.

The company, one of China’s largest real estate developers, has already triggered market turmoil in the country as its bonds and stocks have plummeted. Investors are concerned that a default could have an impact on the Chinese banking system and the wider economy, as well as trigger social unrest. Investors and the company’s own employees have already protested at Evergrande’s headquarters in Shenzhen, as well as in the provinces of Sichuan, Jilin and Henan.

New shoots affect growth prospects

The coronavirus, for its part, could continue to affect the economy. A new outbreak in the southeastern province of Fujian “poses a downside risk to our forecast of a growth rebound” in the fourth quarter, after a weak third quarter, wrote Louis Kuijs, head of Asia economics for Oxford Economics, in an investigative report Wednesday.

He added that he hopes that “the strict position on financing for real estate developers will be maintained and that the tightening of regulations on Internet companies will weigh on sentiment and growth,” referring to the current government crackdown on big tech companies.

However, Kuijs added that the Chinese government will likely do its best to avoid a sharp slowdown. He expects the authorities to support growth in the coming months by cutting interest rates and allowing local governments to issue more bonds to finance infrastructure projects.