When China leaves zero-Covid, what will the economy look like in 2023?

Hong Kong
CNN
—

As China moves ever closer to fully recovering from three years of government-imposed Covid isolation and reintegration with the world, economic expectations are high.

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

Covid lockdowns and border restrictions have thrown China out of sync with the rest of the world, disrupting supply chains and damaging 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 in for a bumpy ride in the first months of 2023.

China’s historic property slump and a potential global recession could also cause more headaches in the new year, they added.

“In the short term, I think 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, a Boston-based investment company.

For nearly three years, China stuck to its zero-tolerance approach to the virus, even as the policy caused unprecedented economic damage and widespread frustration. In 2022, growth slowed sharply, company profits collapsed, and youth unemployment rose to record levels.

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

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

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

Already, the rapid spread of infection has driven many people indoors and emptied shops and restaurants. Factories and companies have also been forced to close or cut production as more workers fall ill.

“Living with Covid will be more difficult than many assume,” said analysts at Capital Economics.

They expect China’s economy to contract by 0.8% in the first quarter of 2023, before picking up again in the second quarter.

Other experts also expect the economy to recover after March. In a recent research report, HSBC economists forecast a 0.5% contraction in the first quarter but 5% growth overall for 2023.

China’s haphazard reopening isn’t the only factor dragging down the economy. In 2023, experts will continue to watch as policymakers attempt to fix the country’s ailing real estate sector, which accounts for nearly 30% of GDP.

The crisis in the industry – which began in late 2021 when several high-profile developers defaulted on their debt – has delayed or halted the construction of pre-sold homes across the country. It sparked a rare protest from home buyers this year, who refused to pay mortgages on unfinished homes.

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

Property sales measured in value fell by more than 26% in the first 11 months of the year. Investments in the sector fell by 9.8%.

At a key policy meeting earlier this month, top leaders pledged to focus on boosting the economy next year, hinting they would roll out new measures that improve the financial health of the property sector and boost confidence in the market.

“The measures announced so far are not sufficient to bring about a turnaround, but policymakers have signaled that more support is on the way,” Capital Economics analysts said.

“This should reassure homebuyers enough to increase sales perhaps before the middle of next year.”

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

Trade had driven much of China’s economic growth earlier this year, as exports were boosted by rising prices for the country’s goods and a weaker currency.

But in recent months, the trade sector – which accounts for about a fifth of China’s GDP and provides 180 million jobs – has begun to show cracks from a global economic slowdown.

Last month, China’s outbound shipments fell 8.7% from a year earlier, much worse than October’s 0.3% decline. It marked the worst performance since February 2020, when the Chinese economy nearly ground to a halt amid the first coronavirus outbreak.

Countries around the world are facing recession as policymakers continue to raise interest rates to combat rising inflation.

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

“But a looming global recession means they are likely to have to fall further over the next few quarters.”