End of Covid zero help policy, but Chinese economy should lose strength in 2023

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As China moves ever closer to fully re-emerging from three years of government-imposed Covid lockdown and reintegrating into the world, economic expectations are high.

Beijing’s recent reversal of its strict Covid-zero strategy – which has long stifled local businesses – is expected to inject vitality into the world’s second-largest economy this year.

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Lockdowns and border restrictions amid the Covid pandemic have left China out of sync with the rest of the world, disrupting supply chains and hindering the flow of trade and investment.

With the global economy now facing significant challenges, including energy shortages, slowing growth and high inflation, China’s reopening could provide a much-needed and timely boost.

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But the reopening process is likely to be erratic and painful, according to economists, with the country’s activity struggling in the first few months of 2023.

China’s historic real estate downturn and a possible global recession could also cause more headaches in the new year, they added.

“In the short term, I believe China’s economy is likely to experience chaos rather than improvement for one simple reason: China is ill-prepared to deal with Covid,” said Bo Zhuang, senior analyst at Loomis, Sayles & Company, a investment firm based in Boston.

For nearly three years, China has maintained its zero-tolerance approach to the virus, even though the policy has caused unprecedented economic damage and widespread frustration.

In 2022, growth slowed sharply, corporate profits plummeted and youth unemployment reached record levels.

Amid growing public unrest in the country and financial pressure, the government abruptly changed course this month, effectively abandoning Covid zero.

While the easing of restrictions is a long-awaited relief for many, the brusque manner in which it was done caught a population unprepared, off guard and left them largely alone to fend for themselves.

“In the initial phase, reopening could trigger a wave of Covid cases that could overwhelm the health system, reducing consumption and production in the process,” Zhuang said.

The rapid spread of the infection has already driven many people indoors and emptied stores and restaurants. Factories and businesses have also been forced to close or cut production as more workers are falling ill.

“Living with Covid will be more difficult than many assume,” analysts at Capital Economics said. They expect China’s economy to contract by 0.8% in the first quarter of 2023 before recovering in the second quarter.

Other experts also expect the economy to recover after March.

In a recent research report, economists at HSBC projected a 0.5% drop in the first quarter, but overall 5% growth for 2023.

Real estate market

China’s botched reopening isn’t the only factor hurting the economy.

In 2023, experts will continue to watch as policymakers try to fix the country’s real estate sector, which accounts for nearly 30% of GDP.

The crisis in the sector – which began in late 2021, when several high-profile developers defaulted on their debts – has delayed or halted construction of pre-sold homes across the country.

That triggered a rare outcry last year from homebuyers who refused to pay mortgages on unfinished homes.

While Beijing has made a series of attempts to rescue the sector – including the unveiling in November of a 16-point plan to ease the credit crunch – the statistics still paint a bleak picture.

Real estate sales, in terms of value, fell by more than 26% in the accumulated until November of last year. Investment in the sector fell by 9.8%.

At a key policy meeting in early December, top leaders pledged to focus on boosting the economy in the coming year, hinting they would roll out new measures that would improve the housing sector’s financial condition and boost market confidence.

“The measures announced so far are not enough to trigger a turnaround, but the government has signaled that more support is on the way,” analysts at Capital Economics said.

“That should give consumers enough peace of mind to increase sales perhaps before the middle of the year.”

Global recession fears

A possible global recession is another key concern that will shape China’s economic landscape in 2023.

Trade drove much of China’s economic growth in early 2022, as exports were boosted by the country’s rising commodity prices as well as a weaker currency.

But in recent months, foreign trade – which accounts for about a fifth of China’s GDP and generates 180 million jobs – has begun to crack due to the global economic slowdown.

In November, Chinese exports fell 8.7% year-on-year, much worse than October’s 0.3% drop.

It was the worst performance since February 2020, when the Chinese economy nearly ground to a halt amid the initial coronavirus outbreak.

Countries across the world are facing recession as central banks keep raising interest rates to fight rising inflation.

“Exports [da China] have already reversed much of their boom from the pandemic years,” said analysts at Capital Economics.

“But an impending global recession means they are likely to fall further in the coming quarters.”

Source: CNN Brasil

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