China’s meager growth and high unemployment in the first half of 2022 is disproportionately due to weakness in private economic activity, which typically accounts for over two-thirds of China’s output and four-fifths of urban employment. Many small private firms and individual businesses are probably facing an existential crisis amid the widespread lockdowns under China’s zero-COVID policy. Those that have survived the lockdowns are probably holding off making major new investments. As China strives to stabilize employment and achieve the “best possible” growth results in the rest of this year, reviving the private sector is essential.
In industry, revenue growth of private firms lagged that of state firms, with profits of the former down by over 3 percent in the first half of 2022 and profits of the latter up more than 10 percent. The pace of fixed asset investment led by minjian or nongovernmental domestic investors also lagged that of state firms. Indeed the figure below shows that the gap in investment growth between the two forms of ownership widened substantially in the first half of 2022, reaching similar levels in 2020 when the initial Wuhan outbreak hurt private enterprises especially hard, with minjian investment expanding at a pace well under half that of state firms.
A large part of this differential performance was due to COVID-19 lockdowns, which depressed face-to-face transactions, leading to an outright year-over-year decline in service sector output in the second quarter this year. The sharpest declines were recorded in property and hotels and catering, services that are heavily dominated by private firms. Heightened regulatory uncertainty, which has made long-term planning and investment more difficult especially for private investors, may have also played a role.
Achieving stronger growth and a better job market in the second half of 2022 depends critically on controlling COVID-19 outbreaks and revising the government’s zero-COVID policy, which the World Health Organization director-general described as unsustainable. As the Omicron BA.4 and BA.5 virus subvariants, which are reportedly more transmissible than previous subvariants, spread across the globe including in China, costs of maintaining zero-COVID will likely get higher. If lockdowns become widespread again, private economic activity will continue to be depressed, growth will likely remain weak, and unemployment will stay high.