How China’s COVID restrictions could threaten the country’s economic recovery

Shehzad Qazi, managing director at China Beige Book International, joins Yahoo Finance Live to discuss what's impacting China's GDP numbers and how its recent uptick in COVID cases could affect its economic recovery.

Video Transcript

RACHELLE AKUFFO: And the pressure on China is an importer of course, you have COVID and then you have the Russia Ukraine crisis. So let's break some of this down as China comes out with key GDP data. We're bringing in our guest here, Shahzad Qazi, China Beige Book International managing director. Welcome to the show. So first, I want to start with China's first quarter GDP data coming in at 4.8% year on year. How would you characterize it as well as the impact that its COVID zero tolerance policy has had on economic growth?

SHEHZAD QAZI: Yeah, there are a couple of things that I want to point out for your audience here. The first one is that the Chinese economic data are certainly looking a lot better than what a lot of the folks in the markets, and especially Wall Street, were predicting going as far as saying that there was going to be 0% growth. One of the things that we've been telling clients for weeks and weeks now is that economic conditions are far better than a 0% growth scenario. You're seeing factory activity lose steam. You're seeing retailing taking a battering. But you are seeing a nascent recovery in the property market.

And to your second question, the COVID lockdown situation, what you're seeing is the services industry actually did better in January and February compared to where it was last year. And it may have done continued that path of acceleration. But what you got were these large scale lockdowns started to take place in various parts in the major cities. And you see an immediate reversal in services performance where you see the sector just getting absolutely shattered in the month of March. And so that's the lens with which we should view the rest of the year, the impact of COVID lockdowns on economic growth this year.

RACHELLE AKUFFO: And obviously, there's always high expectations when it comes to China's economic growth. So it important to put that into context. And we do know that Beijing is looking for 5.5% growth for 2022. Do you think the worst of the economic fallout has already been factored in at this point.

SHEHZAD QAZI: So Chinese GDP growth figures are number one a political figure. And we know from history that if the Chinese government decides, the party decides it's going to have a certain GDP growth figure, it's going to always hit it officially whether it's through data manipulation or whatever else you may have. The real question is trying to understand what's going on on the ground in terms of what thousands of businesses are actually experiencing. And I think we can-- looking far up ahead, we can continue to see that there's going to be a lot of pressure on the consumption side of the economy.

We also know that the growth playbook in China has changed. We no longer have that old model of high debt, high investment, high growth, which means that slower growth is something that we're going to have to get used to. And those days of double digit growth, a 6.8% growth, are long gone. So again, COVID is the one to look out for. But of course, the other real question is, which industry is going to be the growth driver this year in China? And there isn't any one contender that sticks out.

RACHELLE AKUFFO: And that's certainly not good news for China's economy when you consider it was really trying to push for this dual circulation strategy to be the next growth engine there. What are your expectations there? And what do you think we might see in terms of potential government intervention?

SHEHZAD QAZI: So government intervention is the other important thing to talk about stimulus, policy easing. Again, we've gotten a lot of predictions. They've all fallen flat because stimulus is part of that old playbook again that I had mentioned is out the window. Now you are going to get some type of policy support no doubt. And as a matter of fact, what you're seeing on the ground in the China Beige Book surveys for example, is that even though companies are not borrowing right now, borrowing is at an all time low, the indicator for pent up demand for credit, as in demand for loans, is starting to perk up. It's starting to rise.

So we would expect in the coming months and in the coming weeks even perhaps for corporate borrowing to start to rise, which could potentially ease some pressures. However, we're not looking at a American-style consumer stimulus take place, which means that if there are lockdowns, if there is a rise in virus cases, well, consumption activity is going to remain under serious and tremendous amounts of pressure even if Chinese companies get some amounts of support as far as access to loans, and credit, and lending is concerned.

RACHELLE AKUFFO: And we did see the Chinese yuan is also under pressure from the ongoing fallout from Russia's invasion of Ukraine. We saw the Institute of International Finance calling the capital outflows from global investors unprecedented. Do we expect to see perhaps any changes in terms of businesses or any acts that we might see in terms of fiscal policy?

SHEHZAD QAZI: Look, there are certain signs that we're picking up. For some amounts of fiscal support, very limited in nature, it's not certainly going to be the big juicer of growth this year. That much, I think we can say with a lot of certainty. In terms of capital outflows, yes you are seeing that challenge. But there isn't any type of large scale relocation of businesses to the extent that companies wanted to move supply chains out of China or diversify their supply chains. We've seen a lot of that happen over the last couple of years. There isn't necessarily a giant push for that to be the case in 2022.

RACHELLE AKUFFO: Now I do want to look, obviously China is one of these economic performers that the IMF and others really thought would be the global growth engine for the rest of the world as they do try and come out of this pandemic slump. But we did see numerous reports about China's second largest property developer Evergrande. And there were all these concerns about contagion. But you're saying that those were overstated. What are you seeing that's making you more optimistic about what you're seeing in China's real estate sector?

SHEHZAD QAZI: Yeah, you're always going to have these high profile companies, which will suck up a lot of the oxygen in the room, especially if they're on the verge of default, et cetera. But when you go out there and you talk to, or you survey hundreds and hundreds of property companies, what you walk away with seeing is that the worst of the crisis was most certainly at the end of last year. You're starting to pick up a nascent recovery on the developer side, you're starting to see sales pick back up, you're starting to see pricing improve a little bit, and especially in the big markets.

That's the real tell. Because those are the drivers of the property market in China. And business conditions are starting to improve. Now, the residential side of the property market is yet to catch up. It's not seeing the same sort of improvement or recovery, nascent recovery as I like to call it, that the commercial side is. But most certainly, the idea that the property market continues to struggle is dated. And I think data that will come out in the coming weeks will most certainly show that we've reached that inflection point, that there is a recovery that's taking place.

RACHELLE AKUFFO: All right. Great to get your insights. Shehzad Qazi there, China Beige Book International managing director. Thank you so much.