China’s nearly three-year policy of enacting strict lockdowns to contain outbreaks of Covid-19 came with a heavy price for the world’s second largest economy.
The question for its president, Xi Jinping, and his inner court of advisers is whether a sudden relaxation of lockdown rules brought in this week will both prevent a recurrence of the shockwave of protests across the country and turn the economy around.
In the couple of days after Beijing’s announced relaxations to the rules – including allowing people with mild or no symptoms to quarantine at home – the signs are only modestly hopeful.
A lack of effective vaccines and the fact much of the population has not had no jab or fewer than the three needed for full protection will mean that employers must cope with a workforce plagued by ill-health, possibly hitting production as much as any lockdown.
State-run newspapers have welcomed new vaccines being validated by the government, but little is know publicly about how well they will work.
Meanwhile, reports that pharmacies are already running short of basic medicines such as ibuprofen are undermining public trust in the health system and its ability to protect them without lockdowns in place.
Nevertheless, Xi had little choice when he decided to ease restrictions. Not only were protesters calling for him to quit in unprecedented public outbursts, trade with the rest of the world had slumped and youth unemployment soared.
As a measure of the stagnation Beijing is now wrestling with, inflation dropped to just 2.5% in October and core inflation, excluding volatile elements such as energy and food, stands at 0.6%. The almost complete lack of domestically driven inflation reveals an economy stuck in neutral.
Last month’s export figures showed exports had contracted 8.7% from a year earlier, a much bigger fall than the 6.7% forecast by analysts and the 0.3% dip in October. Imports also fell sharply by 10.6% from a 0.7% drop in October as the domestic demand for imported soya beans and iron ore declined.
The International Monetary Fund boss, Kristalina Georgieva, said last month that it might have to trim its forecast for China’s economic growth without an overhaul of Covid restrictions. Before her comments, the IMF predicted that Chinese gross domestic product (GDP) would expand 3.2% this year and 4.4% in 2023.
Beijing’s Covid control reforms announced on Wednesday also included adjustments to the duration and scope of lockdowns, with cities required only to close off apartments and affected floors, rather than entire city blocks.
Health officials are still warning that trends in fatalities will be closely watched and they reserve the right to introduce tougher measures if needed.
However, Xi has let it be known local governments should not use the previous “one-size-fits-all” approach and health authorities can adopt the same flexible policy.
Julian Evans-Pritchard, senior China economist at the consultancy Capital Economics, said the change of heart in Beijing was unlikely to prevent a further fall over coming quarters, limiting a recovery to the second half of next year.
“Outbound shipments will receive a limited boost from the easing of [China’s] virus restrictions, which are no longer a major constraint on the ability of manufacturers to meet orders,” he said.
“Of much greater consequence will be the downturn in global demand for Chinese goods due to the reversal in pandemic-era demand and the coming global recession.”
As an example of the hit to individual companies, Apple supplier Foxconn said revenue in November dropped 11.4% year on year, following production problems related to Covid-19 controls at the world’s biggest iPhone factory in Zhengzhou. The iPhone 14 is expected to be in short supply this Christmas as a result.
Albert Edwards, a global Strategist at Société Générale, said China’s central bank was likely to stimulate the economy with cheap money, in part to boost consumer and business spending and offset the impact of recession in most of the industrialised world.
Ali Jaffari, head of North American capital markets at Validus Risk Management, said a 10% slump this year in the value of the yuan indicated the difficulties faced by the Chinese economy.
“China’s economic outlook remains vulnerable as the state continues to experience lacklustre growth. The property market is in a slump, manufacturing and production levels are coming in below estimates and export demand is fading,” he said.
Attempts by the central bank to boost borrowing, including cutting the amount of cash that banks must hold as reserves and loosening financing curbs to rescue the property sector, were unlikely to have much of an effect, Jaffari added, though financial markets were buoyed up by the easing of restrictions, sending the stock market higher.
Promoting a more upbeat message on the day Covid controls were eased, Chinese state media reported that a high-level meeting of the ruling Communist party’s politburo had emphasised the government’s focus in 2023 would be on stabilising growth, promoting domestic demand and opening up to the outside world.
It might prove to be enough to persuade the IMF to maintain its forecasts for 2023, but without more effective vaccines, lockdowns are expected to continue in China when the rest of the world has moved on, limiting growth for some time.
