See what to expect from the Chinese economy in 2023 after 3 years of isolation against Covid

As China moves ever closer to reintegrating into the world after three years isolated by government-imposed COVID-19 policies, economic expectations are high.

Beijing’s recent pivot from its strict Covid-zero strategy – which has long stifled business – is expected to inject vitality into the world’s second-largest economy in the coming year.

Covid lockdowns and border restrictions have thrown China out of sync with the rest of the world, disrupting supply chains and hampering the flow of trade and investment.

And 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.

But the reopening process is likely to be erratic and painful, according to economists, with the country’s economy 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, experts added.

“In the short term, I believe China’s economy is likely to experience chaos rather than progress for one simple reason: China is ill-prepared to deal with Covid,” said Bo Zhuang, senior sovereign analyst at Loomis, Sayles & Company, 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 hit record levels.

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

While the easing of restrictions has been a long-awaited relief for many, the abruptness caught an unprepared public off guard and left them largely alone to fend for themselves.

“In the initial phase, I believe 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 report, HSBC economists projected a 0.5% contraction in the first quarter, but overall 5% growth for 2023.

Real estate market

China’s abrupt 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 from homebuyers this year who refused to pay mortgages on unfinished homes.

While Beijing has made a number of attempts to rescue the sector – including releasing a 16-point plan last month to ease the credit crunch – the statistics still paint a bleak picture.

Home sales by value are down more than 26% in the first 11 months of this year. Investment in the sector fell by 9.8%.

At a key policy meeting earlier this month, 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 policymakers have signaled that more support is on the way,” analysts at Capital Economics said.

“That should reassure homebuyers enough to pick up sales perhaps before the middle of next 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 earlier this year, as exports were boosted by the country’s rising commodity prices and a weaker currency.

But in recent months, the commercial sector – 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.

Last month, China’s overseas shipments contracted by 8.7% year-on-year, much worse than the 0.3% drop in October. That marked 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 policymakers keep raising interest rates to fight rising inflation.

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

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