Will China manage to revive its economy with the end of ‘zero covid’?

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Faced with uncertainty and even a wave of unusual protests, China decided that the drag on social stability and national accounts of ‘zero covid’ is excessive and has begun a process of reopening amid doubts about how the economy will react to a “return to normality”.

In March, Beijing had set a growth target of around 5.5% for 2022 – one of the lowest in decades although ambitious given the situation – but lockdowns such as the one in Shanghai in spring caused the national economy to contract by 2.6% in the second quarter compared to the previous one.

The forecasts of international institutions now point to lower growth: the International Monetary Fund (IMF) expects China to grow by 3.2% in 2022, while the World Bank puts the rate at 2.8%.

According to Alicia Garcia-Herrero, chief economist at Natixis (NYSE):99V33V1Z3=MSIL) for Asia-Pacific, mobility restrictions imposed under the ‘zero covid’ policy could have caused Chinese GDP to stop growing by as much as 2.5 percentage points this year.


Beijing’s redoubled commitment to ‘zero covid’ in 2022 took consumption ahead, as shown by official retail sales statistics: after starting the year strong with a rebound of 6.7% in the first two months, the arrival of the omnin variant and the aforementioned confinements sank the indicator, which in April fell by 11.1% year-on-year.

After a summer of some calm and recovery, the autumn wave of infections, which broke records in China since the beginning of the pandemic, resulted in a further drop in retail sales in October, of 0.5%, again evidencing the pernicious effect of restrictions and confinements on consumer sentiment.

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The fall in demand at the national level has also opened a wound in the official foreign trade data, which in November reflected a year-on-year fall of 10.6% in imports denominated in dollars, the largest in the last 30 months.

Abandoning the ‘zero covid’, China would boost demand “in the medium term”, explain Julian Evans-Pritchard and Zichun Huang, analysts at the consultancy Capital Economics, who, however, warn that the transition to a strategy of coexistence with the virus similar to that adopted in other countries “will probably take time”.

Likewise, another factor that could hinder the reactivation of consumption is the fear that part of the Chinese population has developed before the possibility of becoming infected after almost three years in which official propaganda has warned again and again of the dangers of the virus to justify its decision to keep the country without infected.

“Even if mobility restrictions were reduced before the Chinese New Year (the main holiday time of the year in the country, which in 2023 will be celebrated at the end of January), many consumers could avoid crowded areas,” they point out from ING (AS:INGA), which rules out a “significant increase” in consumption in the first quarter of next year.

Added to this are the prospects for a global recession that will further weigh on exports, which in November had fallen at their fastest pace since the beginning of the pandemic (-8.7%) in the face of the fall in foreign demand, affected by factors such as high inflation or aggressive interest rate hikes.

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The Politburo, the top of the Communist Party of China (CPC), pointed this week to a “general improvement” of the economy in 2023 in which it will focus on “stabilizing growth, employment and prices”, as well as “effectively preventing and defusing significant risks”.

The agency also wanted to guarantee the continuity of its “proactive” fiscal policy and its “prudent” monetary policy, describing the latter also as “precise” and “forceful”.

Zhang Zhiwei, an analyst at Pinpoint Asset Management, quoted by the Hong Kong newspaper South China Morning Post, highlighted some “positive messages” from the Politburo as the promise to “boost market confidence with vigor”, which, in his opinion, anticipates “kinder” policies towards market players in 2023.

Both the yuan and the Chinese stock markets have rebounded strongly in the face of successive announcements of withdrawal of restrictions by the authorities.

For the consultancy Trivium China, the key message of the Politburo statement is precisely the absence of mentions of the ‘zero covid’ policy: “It indicates that the Party’s priority is no longer the control of the pandemic but economic recovery. (…) How policymakers guide China through the first big wave of covid in this new era will determine how quickly Beijing will be able to revive the economy.”

“Insufficient levels of vaccination and inadequate health resources mean that China has embarked on a chaotic exit from ‘zero covid’ that will severely burden public health and the economy. We expect things to get much worse before they start to get better,” he adds.

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The end of ‘zero covid’ does not guarantee that 2023 will be a bed of roses for China due to other factors such as the real estate crisis or the trade and technology war with the US, as pointed out by Arup Raha, of Oxford Economics, who forecasts a GDP rebound of 4.2% next year but warns: “Even without covid, the housing bubble is slowly deflating and political tensions are rising. Recovery will be slow, and the region (Asia) will feel the pain.”

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