China’s economy had a surprisingly good start to the year, but it may not last

Retail sales rose 6.7% in the first two months of 2022 compared to a year ago, according to data released by the National Bureau of Statistics on Tuesday. That was well above the estimated 3% increase in a Reuters poll of economists.

Industrial production jumped 7.5% during the same period, also surpassing the forecast of 3.9%.

“The national economy has continued to recover steadily, the production demand has grown rapidly, and employment and prices have been generally stable,” the bureau said in a statement.

While experts say that government policies such as interest rate cuts and more infrastructure spending have boosted the Chinese economy, they warn that there are multiple challenges on the horizon.

“Macro data are quite strong in Jan and Feb, which shows the government’s supportive policies have started to help the economy,” wrote Zhiwei Zhang, chief economist for Pinpoint Asset Management, in a note on Tuesday. “But the macro outlook in the next few months remains challenging,” he said, pointing to recent Covid outbreaks as the main risk.

The release of the data comes as China is facing its worst Covid surge since the original outbreak in Wuhan in early 2020.

On Sunday, China reported 2,125 local Covid-19 cases across 58 cities—the fourth consecutive day that the country reported over 1,000 daily local infections—according to the National Health Commission (NHC).

In the technology hub of Shenzhen, all businesses — apart from those deemed essential or engaged in supplying Hong Kong — have suspended operations or have implemented work-from-home policies.

Apart from Shenzhen, local authorities in the northeastern province of Jilin have also banned residents from leaving or traveling since Monday. The province, with 24 million people, is home to the industrial hub of Changchun, where Toyota and Volkswagen run their car factories in partnership with state-owned car maker FAW Group.

Shanghai, the country’s largest business center, has also imposed stringent measures after a spike in Covid cases, closing schools and cinemas and restricting travel into the city.

These lockdowns come just months after China shut the northwestern city of Xi’an, which hit major business operations, including those of Samsung and Micron, two of the world’s biggest chipmakers.

These stringent measures taken to control the pandemic have hit China’s economy hard in recent times. Earlier this month, the government set an economic growth target at around 5.5% for 2022, the lowest official goal in decades.

The story will be updated.

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