China’s screeching about-face on Covid will not be an instant fix | China

From zero tolerance to “let it rip”. Not only has China changed its mind on how to deal with Covid, it has made the mother of all about-faces in response to slowing growth and mounting civil unrest due to draconian lockdowns.

If Beijing expects an immediate economic boost from the abandonment of its tough controls, it is wrong. There will be a growth dividend from the policy change, but the health of the world’s second largest economy will deteriorate before it improves and it will take at least next spring for the easing of restrictions to start paying dividends.

Meanwhile, China could experience a tech recession this winter as workers stay home for fear of contagion and factories face staff shortages. Almost every country that has moved from lockdowns to a “we must learn to live with Covid” approach has suffered an exit wave of rising infections, and China is following the same pattern.

People change their behavior either because they have the virus or because they think they might catch it. Subway usage in Beijing, where the rise in cases has been sharpest, is at 20% of pre-pandemic levels.

Given China’s position as the world’s largest exporter of goods, the implications are clear. Companies are confronted with staff shortages. Production levels will fall and supply chain bottlenecks will increase, adding to inflationary pressures in developed markets like the UK. The pressure on the cost of living will ease more slowly than it would otherwise.

As Susannah Streeter, analyst at Hargreaves Lansdown, says: “Mass hospitalizations are likely to worry consumers and businesses again, further weighing on the Chinese economy, while the prospect of renewed supply chain problems could prolong price pains being felt in countries around the world. “

Mark Williams, Asia chief economist at consultancy Capital Economics, estimates that China’s economy will shrink 2.5% this year and grow 2% next year — a far cry from the double-digit annual growth rates recorded a decade ago.

“So far, the reopening has been completely negative for the economy,” he says. “Activity has been depressed for most of the past year as fears of being forced into quarantine have kept people at home. Fears of quarantine have now given way to fears of contagion and the economic record is even worse.”

If infections peak within the next month or so, as expected, other countries have found it will take time for people to feel confident enough to resume normal life. Activity will not fully recover until early spring.

Overall, analysts believe the turnaround will lead to stronger Chinese growth and a pick-up in global trade. David Rees, Emerging Markets Economist at Schroders, said: “There is a great deal of uncertainty about how much disruption will be caused by the outbreak wave of infections. But ultimately, easing Covid restrictions will release the handbrake that has held activity back and allow for better transmission of existing political support.”

Leave a Reply

Your email address will not be published. Required fields are marked *