Saturday , September 30 2023

China no longer adheres to its zero-Covid policy. What will 2023’s economy look like?

Economic expectations are high as China gets closer and closer to fully reintegrating with the world after three years of government-imposed isolation.

It is anticipated that Beijing’s recent departure from its stringent zero-Covid strategy, which for a long time stifled businesses, will bring vitality to the world’s second-largest economy next year.

China has been out of sync with the rest of the world due to covid lockdowns and border restrictions, which has hampered the flow of trade and investment and disrupted supply chains.

China’s reopening could also provide a timely boost to the global economy, which is currently facing significant challenges such as energy shortages, sluggish growth, and high inflation.

However, economists predict that the reopening will likely be erratic and painful, as the country’s economy is set for a rough start to 2023.

They added that a potential global recession and China’s historic property downturn could also cause additional issues in the new year.

“For a straightforward reason, I believe that China’s economy will likely experience chaos rather than progress in the short term: Bo Zhuang, senior sovereign analyst at Loomis, Sayles & Company, a Boston-based investment firm, stated, “China is poorly prepared to deal with Covid.”

Despite the fact that the policy caused unprecedented economic damage and widespread frustration, China maintained its zero-tolerance approach to the virus for nearly three years. In 2022, there was a sharp slowdown in growth, a decline in company profits, and a record rise in youth unemployment.

The government abruptly changed course this month, effectively abandoning zero-Covid, amid growing public unrest and financial stress.

Although many people have been waiting for this relief for a long time, the sudden change has surprised an unprepared public and left them mostly on their own.

Zhuang stated, “I believe the reopening may unleash a wave of Covid cases in the initial phase that could overwhelm the health care system, dampening consumption and production in the process.”

Already, the rapid spread of the disease has kept many people inside and closed restaurants and stores. Due to an increasing number of sick workers, factories and businesses have also been forced to close or reduce production.

On December 28, 2022, customers of a national drugstore chain’s flagship store in Hangzhou, in the east of China’s Zhejiang province, waited in line to receive free ibuprofen tablets to treat fever.
On December 28, 2022, customers of a national drugstore chain’s flagship store in Hangzhou, in the east of China’s Zhejiang province, waited in line to receive free ibuprofen tablets to treat fever.
Capital Economics analysts predicted that “Living with Covid will be more difficult than many assume.” Images courtesy of CFOTO, Future Publishing, and Getty Images.

In the first quarter of 2023, they anticipate that China’s economy will shrink by 0.8% before recovering in the second.

The economy will also recover after March, according to other experts. Economists at HSBC predicted a 0.5% decline in the first quarter but a 5% increase overall for 2023 in a recent study.

Real estate market

The economy is also being hampered by other factors, including China’s hasty reopening. Experts will keep an eye on how policymakers try to fix the country’s failing real estate industry, which contributes nearly 30% of GDP, in 2023.

Pre-sold homes across the nation have been delayed or halted as a result of the industry crisis, which began late in 2021 when several prominent developers defaulted on their debt. This year, homebuyers staged a rare protest by refusing to pay mortgages on unfinished homes.

Despite Beijing’s efforts to save the industry, which have included announcing a 16-point plan to ease the credit crunch last month, statistics continue to paint a grim picture.

In the first eleven months of this year, property sales by value fell by more than 26%. 9.8 percent was lost in sector investment.

Leaders pledged to focus on boosting the economy next year during a crucial policy meeting earlier this month, indicating that they would implement new measures to improve the property sector’s financial condition and boost market confidence.

Analysts at Capital Economics stated, “The measures announced so far are not sufficient to drive a turnaround, but policymakers have signaled that more support is on its way.”

Fears of a global recession

Another major concern that will shape China’s economic landscape in 2023 is the possibility of a global recession.

Earlier this year, as exports were boosted by rising goods prices and a weaker currency, trade had fueled much of China’s economic expansion.

However, a global economic slowdown has begun to show signs of weakness in the trade sector in recent months, which contributes 180 million jobs and accounts for approximately a fifth of China’s GDP.

In comparison to October’s 0.3% decline, China’s outbound shipments decreased by 8.7% from a year earlier. That was the worst performance since February 2020, when the first coronavirus outbreak nearly brought the Chinese economy to a halt.

As policymakers continue to raise interest rates to combat rising inflation, nations around the world are experiencing a recession.

Analysts at Capital Economics stated that “[China’s] exports have already reversed much of their pandemic-era boom.”

“But they probably have to fall even more over the next few quarters because of a global recession that is coming.”

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