In November and December, China’s State Council announced the reduction of COVID restrictions and enhanced targeted epidemic prevention and control, which was the beginning of the end of China’s three-year war against COVID-19.in his New Year’s address President Xi admits The country still faces difficulties in ending the pandemic: “We have now entered a new phase of dealing with COVID in which daunting challenges remain,” he said.
The big question is what this means for the Chinese economy in the coming years. The swift and decisive move out of COVID suggests that supporting growth is back at the top of the government’s policy agenda.
COVID and related measures have wreaked havoc on the business environment in China. Therefore, economic normalization in the short term will be gradual and incomplete. Growth likely reflects the gradual slowdown experienced prior to the spread of the coronavirus, underscored by longer-term factors, including population aging and economic restructuring, as well as emerging challenges, including heightened geopolitical tensions.
Policies to eliminate emerging coronavirus lead to economic downturn
The Chinese economy has been on a difficult road since the COVID-19 coronavirus first hit the country in early 2020. After experiencing a sharp decline in 2020, the Chinese economy will achieve a healthy recovery in 2021.
The economy will not perform well in 2022, especially in the second quarter. A major factor has been the rise in COVID cases since mid-March and the resulting lockdowns and other severe restrictions that have lasted until at least late November. From mid-March to the end of April, the average daily number of new COVID cases rose to around 2,100, up from 540 in the first half of March.
This has led to a series of lockdowns at the city, district or community level, including in coastal commercial centers such as Shanghai, Guangzhou and Shenzhen. Although the average daily number of new cases has since declined, falling to less than 400 in May, various anti-epidemic measures are still in place, casting a shadow over China. no new coronary pneumonia policy.
Prolonged movement restrictions have had a severe and immediate impact on the economy, leading to disruptions in supply chain-related logistics and personal services. April 2022 is the worst-hit month, with road freight volumes and turnover shrinking by 14.3% and 6.6% year-on-year, respectively. Despite gradual improvements since then, the October figures remained negative at -7.8% and -3.0%, respectively.
Consumption has also been hit hard. In the first 10 months of 2022, the total retail sales of consumer goods increased by only 0.6% year-on-year, and the catering industry contracted by 5%. In 2019, the total retail sales and the catering industry increased by 8.1% and 9.4% respectively between January and October.
Economic growth had slowed in the decade before COVID, and is likely to continue.
This turmoil hurts China’s investment climate. Annual growth in fixed asset investment slowed to 5.9 percent in the first nine months from 9.3 percent in the first quarter. Investment has been particularly weak in the non-state sector, including domestic private firms and foreign-invested firms.
what’s next is unclear
The measures announced by the Joint Working Group on Epidemic Prevention and Control of the State Council of China have changed from the previous thinking of large-scale testing and restrictions to vaccine protection. Gradually cancel mandatory PCR testing and centralized isolation, and actively strengthen vaccinations for vulnerable groups such as the elderly. Such a move is much needed and a clear advantage for the economy.
While we expect a healthy recovery in 2023, the extent of the economic recovery remains unclear. First, implementing new policies and normalizing the economy will take time and effort. Second, COVID-related economic disruptions could be prolonged, lowering China’s growth trajectory. Third, economic growth had been slowing in the decade before COVID and is likely to continue. Ultimately, China’s economic performance will depend on the global economy and the various new challenges it faces.
Economic slowdown is likely to persist
The government’s policy shift to manage COVID has moved too quickly and appears unprepared. Interestingly, shortages of antigen test kits and fever reducers are common.
There are also questions about the readiness of new economic policymakers for the daunting task ahead. Although the recently concluded party congress identified Li Qiang as the most likely new prime minister, his team has until March’s national congress to take office. It is unclear when a comprehensive, coherent economic blueprint will be released, which will affect economic outcomes in 2023.
Prolonged and severe restrictions related to the coronavirus have had a negative impact on business confidence, among other challenges. The 2022 Purchasing Managers Index (PMI) fell from 51 in January-February to 48.8 in March and 42.7 in April. After briefly rebounding above 50, it has since fallen continuously, falling to 47.1 in November.
What is China’s economic growth in 2023?
According to reports, some MNCs have already started or accelerated their efforts to diversify their suppliers to reduce supply chain disruptions, thereby reducing China’s growth potential in the coming years. In addition, China’s future economy will be constrained by various structural factors such as population aging and industrial upgrading. The global economic slowdown and uncertainties in China’s external environment have also added uncertainty to its future economic growth.
So, what can we expect from China’s growth in 2023? Theoretically, we assume that if there is no pandemic for three years, the Chinese economy will continue the gradual slowdown from 2012 to 2019. This would result in a 22.8% increase in GDP in 2023 compared to 2019.
With the economy growing by 2.2% in 2020 and 8.1% in 2021, and projected to grow by 3% to 3.3% in 2022, how much rebound will be needed in 2023 to achieve the aforementioned 22.8% growth rate? The answer is more than 7.5% – by no means a daunting task.
Given the many challenges and uncertainties, we believe a more realistic forecast would be between 5% and 6%. That’s lower than China’s pre-COVID growth rate of 6% to 7%, but within the government’s growth target for 2022.