China’s economy performed worse in the second quarter of 2022, with gross domestic product (GDP) recording the lowest growth since the start of the Covid pandemic. And a global credit rating agency has given a warning of a potential stagflation.

The National Bureau of Statistics of China announced on July 15 that the world’s second largest economy expanded only 0.4% year-on-year in the second quarter.

According to Nikkei, this marks the slowest quarterly growth since the first quarter of 2020, when China’s economy contracted 6.9% as it was fighting an early outbreak of the coronavirus.

The second-quarter growth is also much lower than the 4.8% expansion in the first quarter of this year.

On a quarter-over-quarter basis, the economy contracted 2.6%.

The statistics bureau said that China was under noticeable downward pressure in the second quarter, citing adverse impacts from unexpected factors such as multiple and sporadic local outbreak of COVID-19 pandemic and challenging international environment.

With the stagnancy in the last quarter, economists are casting doubts on the 5.5% growth target set by the government for this year.

S&P Global Ratings warned that the slowing growth, if plus spiking inflation and interest rate hikes, could lead to stagflation.

In an interview with CNBC aired on July 15, S&P senior research fellow Terry Chan said the reasons for China’s vulnerability are historical. A legacy from the years of high growth led to Chinese businesses becoming highly leveraged, or high in debt. 

Chan said: “Now that China’s growth is slowing down, they’re taking a double hit, both from slowdown in growth and price pressures coming up from overseas because some of the components are being imported.”

In June, China’s consumer prices rose 2.5% from a year earlier, higher from an increase of 2.1% in May, but still within the government’s maximum range for the year, which is about 3%.

But according to SCMP, China is increasingly vigilant of rising inflation in the globe after consumer prices continue their skyward trajectory in the U.S, which hit a nearly 41-year high last month. This pressure could affect China’s own prices in the second half of this year.

On July 13, Premier Li Keqiang warned of imported inflation at a conference on China’s economic situation.

Li said: “To keep the economy running within a reasonable range… we should not only stabilize growth but also prevent inflation and pay attention to preventing imported inflation.” 

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