The Great Reopening: China

On January 8th, inbound travellers to China no longer faced quarantine requirements, effectively reopening one of the world’s largest economies. In the wake of mass popular protests, Beijing ditched the last of its restrictive zero-COVID policy in which the population faced severe limits, frequent lockdowns, and mass testing. According to IMF projections, China’s economy will expand by 5.2% this year, which will provide a boost to the global economy, contributing over a quarter to global growth. The subsequent revival of business and culture sets the stage for an improvement in economic conditions, but the economy could still face some of its toughest challenges amidst a stagnant global economy, low population immunity against COVID and the real estate crisis.

Net exports are an important growth driver for the world’s second-largest economy, contributing 1.7 percentage points to growth in 2021. China recorded a record trade surplus in 2022, reaching $6.3 trillion, helping the economy during zero-COVID times. Beijing’s supply-side policies have bolstered China’s industrial output, but given weakening domestic demand, the nation has become more and more reliant on its large trade surplus to boost growth. In 2023, external demand is expected to be weaker as growth outside of China slumps. Firms may have reassessed their business relationships with Chinese suppliers because of pandemic supply-chain disruption and zero-COVID policy. Furthermore, production will be hampered by the return to work as a result of a chaotic workplace environment caused by worker absenteeism and high infection rates. As firms abandon systems used to prevent workers isolated, labour shortages will disrupt logistics and goods supply for the first few months. Thus, it seems unlikely that net exports will contribute to 2023 growth, and as export growth slows, it may drag on growth for the year.

Secondly, while China’s COVID elimination strategy undoubtedly saved many lives (at great cost to individual freedom), the authorities face a large challenge in low immunity in the general population. With vaccination programs stalling in 2022, and Chinese vaccines offering limited protection, some specialists argue that the economy will experience a chaotic reopening that will unleash a cataclysmic wave of cases that threatens to overwhelm the Chinese healthcare system. The government hasn’t built up necessary stocks of medicines, is lagging in vaccinating the elderly, and with hospitals operating with now ineffective patient treatment protocols, there is a strong chance that this pessimistic case will materialise. Chinese social media reflects this disorder, with reports of long queues outside of pharmacies as families try to buy cold medicines, and hospitals not being able to provide adequate and timely medical treatment due to being overburdened. Although intuitively it seems unlikely that China, a major manufacturer of drugs, would be suffering from a severe medicine shortage, these shortages highlight the slow and ineffective preparation of authorities who didn’t communicate with healthcare institutions and pharmaceutical enterprises to lay out a roadmap for reopening.

Lastly, the evolution of the Chinese real estate sector will have significant importance for the economy, with the sector accounting for a fifth of China’s GDP (predominantly through construction services and real estate services). As a result of authorities intervening to limit risk from real estate price appreciation by controlling leverage in the sector, financial strains emerged within the sector that threaten housing market stability. Evergrande Group, the second largest Chinese property developer by revenue which relied on pre-sales of unfinished housing, defaulted which caused liquidity pressures to spread through the sector. As banks cut down funding to developers and consumers slowed their purchases of housing, nationwide home sales fell, and China has been left with a large stock of unfinished housing. Land sales fell by nearly 50% in the first half of 2022, and construction stalled too. The real estate sector employs a significant part of China’s population, and this decline in credit availability affects other parts of the economy such as demand for materials and construction services, so there is a strong possibility of the property market dragging on growth in 2023.

On a more optimistic note, China’s reopening is welcome news for its regional neighbours due to strong spillover effects from Chinese growth. Asia-Pacific countries export more goods to China than to Western trading partners so reopening will increase domestic demand and provide a boost of growth to nearby economies. Furthermore, as China is a net importer of travel services, as travel patterns normalise, and demand for international travel recovers, pent-up demand to travel will undoubtedly boost foreign GDP. And given China’s strong pre-pandemic demand for hard commodities, the reopening will put upwards pressure on commodities prices such as oil, with net oil exporters such as Canada and some Latin American economies benefitting from these higher prices and demand. Financial markets’ high expectations of China have already appeared in the form of commodities rallies in copper, iron ore and tech stocks, with the Hang Seng Tech index which tracks Chinese giants such as Alibaba and Tencent soaring by 60% from lows in October 2022.

Facing a decline in the working-age population with fewer young people entering the workforce, growth should come through reforms designed to address falling productivity growth. Gradually increasing the labour supply through interventions such as strengthening unemployment benefits, reforming state-owned enterprises to close the productivity gap and raising the retirement age could help China to avoid a fall in growth in the coming years. When China’s growth rate rises by 1%, growth in other nations rises by 0.3 percentage points, so these domestic reforms have importance globally too.

This article was written by Harry Soma, a first-year BSc Economics student at the LSE.

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