China’s Economic Outlook In The Post-Zero-COVID Era – Analysis
The Chinese economy had yet another extraordinary year in 2022. After strong growth of 4.8 per cent in Q1, the economy grew by only 0.4 per cent in Q2. This was due largely to lockdowns under the zero-COVID policy. The economy showed signs of recovery in Q3 with growth reaching 3.9 per cent, but economic activity indicators in manufacturing and services point to a pessimistic outlook for the fourth quarter.
The most significant challenge facing Chinese policymakers in 2022 was the continued implementation of the zero-COVID policy. After successfully suppressing the spread of COVID-19 in 2020, the Chinese government remained vigilant toward its containment. This became the zero-COVID policy in August 2021.
In 2022, the more contagious Omicron variant resulted in frequent COVID-19 outbreaks and lockdowns in many Chinese cities. While the zero-COVID policy was successful in containing the spread of the virus, it became increasingly difficult to do so with rising costs. COVID-19-related restrictions are estimated to have reduced Chinese GDP output by approximately 4–5 per cent from its trend levels. As lockdowns were extended, dissatisfaction and complaints brewed among the public with a consensus that such a large-scale, strict zero-COVID policy was unsustainable.
On 7 December 2022, the State Council announced a new policy which relaxed restrictions on testing, health codes and cross-region movements. This signalled a move away from the zero-COVID policy. The sudden and substantial increase in human mobility and interaction exposed the population to the virus, many for the first time. As the rest of the world celebrated Christmas and the New Year, Chinese households found themselves in a battle against COVID-19. Restrictions on travel were relaxed further as the government announced that from 8 January 2023, incoming passengers would no longer be subject to mandatory quarantine.
The property market experienced a deep recession in 2022 as a continuing result of a policy crackdown since late 2020. The regulation forced real estate developers to deleverage and reign in financial risks. As a result, both sales value and investment fell from their record highs to –26 per cent and –9 per cent respectively in October 2022. Given that the property sector once represented about 20 per cent of economic activity in China, the indirect impact of a regulatory crackdown on China’s growth is yet to be fully realised.
The correction of the property market — at least the cyclical component — is nearly over, although it is unlikely that the property market will revert to its glory days in 2023. The future of the property sector is to meet demand for housing, not for speculative investment. In 2023, supportive policies for top-quality developers and non-luxury housing are expected, with policymakers hoping for a moderate recovery of the housing sector.
The Central Economic Work Conference (CEWC) was held in Beijing on 15–16 December and set up economic objectives and policy priorities for the coming year. Beijing’s top priorities are the stabilisation of growth, the labour market and inflation. Among these objectives, effectively rebooting household consumption will be the government’s biggest challenge.
This is difficult because of the segmented and incomplete social welfare network. Provincial and local governments find it hard to directly support private consumption due to a lack of mechanisms like direct monetary transfers that are available in advanced economies. The lingering effect of lockdowns under the previous zero-COVID policy has caused many small businesses financial hardship, putting downward pressure on consumption growth. It is crucial for the central government to roll out consumption-oriented policies, not rely solely on investment to boost economic growth.
The digital economy could be one of the key drivers of high-quality economic growth, reviving consumption and promoting innovation at the same time. The CEWC showed a supportive stance for online platform enterprises, reiterating their role in economic growth, job creation and global competition — a change of tone from Beijing’s tough crackdown on the industry in 2021.
The development of the digital economy is important for consumption recovery. Online shopping played an important role in stabilising consumption in 2020–21. Without the zero-COVID policy in 2023, retail sales both online and offline are expected to rebound as people increase consumption activities, such as travelling and tourism, that were delayed by COVID-19 restrictions.
It is likely that growth in Q1 will be relatively weak as the nation reaches the peak of infection and deals with the consequent health crisis. Both consumption and production may start to pick up from Q2 as the infection curve becomes flat and most of the population becomes immune to the virus. A steady recovery of economic activity can be expected from mid-year if the central government can roll out growth-stabilising policies and no new COVID-19 outbreaks disturb the return to work and consumption recovery.
Looking beyond 2023, Beijing will need to address supply-side issues, such as unreformed factor markets, to sustain high-quality growth. The government will need to continue to rebalance the domestic economy to be more efficient, more equalised and more resilient to withstand external shocks to achieve a per capita GDP level of a moderately developed economy by 2035.