Tourism "roars back," but Chinese consumers, cities have taken massive hit from zero-Covid -- China Boss update 2.03.23
Update
What happened.
According to the Financial Times, “China’s economy grew by just 3 per cent in 2022, underscoring the heavy costs of the government’s longstanding zero-Covid strategy before it was abruptly abandoned last month.” Data released earlier this month “highlighted the scale of the challenge President Xi Jinping faces after three years in which far-reaching Covid controls took precedence over growth,” FT news staff said.
FT:
In the fourth quarter, GDP was flat compared with the third quarter and rose 2.9 per cent year on year, higher than analyst expectations of a 1.6 per cent increase. Late last year, the government tightened Covid-19 restrictions in response to multiple urban outbreaks before suddenly easing them, allowing the virus to sweep across the population uninhibited for the first time.
Economists expect growth to rebound this year compared with 2022, but policymakers face a host of challenges including Covid, a property crisis that has dragged home prices lower, a slump in exports as the global economy slows and China’s first population decline in 60 years.
Evelyn Cheng at CNBC said that although tourism "is roaring back," it remains unclear if "the $6 trillion consumer market" can fully recover.
CNBC:
At the policymaker level, Chinese authorities say they're prioritizing consumption. Premier Li Keqiang led the first post-holiday executive meeting of the State Council on Saturday, and "called for efforts to expedite consumption recovery and keep foreign trade and investment stable," according to a readout. The meeting said policies to promote the consumption of cars and other big-ticket items would be "fully implemented."
However, unlike the U.S., China has not distributed cash to consumers nationwide in the wake of the pandemic. Li told reporters in 2022 that policymakers would instead focus on supporting businesses and jobs.
China finance expert Eswar Prasad told FT that “[t]he Chinese economy is at a at a pivotal point,” and that “[g]rowth momentum coming out of this difficult period will depend on how much and what kind of stimulus the government employs to put the economy back on track.”
In a separate FT op-ed, Prasad argued that, while China’s zero-Covid policy “had major costs,” it “is likely to leave long-lasting scars on the economy by setting back the government’s much-touted efforts to rebalance growth.”
Prasad, FT:
The erratic and draconian lockdowns disrupted all types of economic activity, but hit household consumption and the services sector especially hard. Industrial activity held up reasonably well until recently but employment growth has lagged behind and the unemployment rate has risen noticeably.
Meanwhile, CNN’s Laura He says “Chinese cities are struggling to pay their bills” as local governments’ ‘hidden debts’ soar.”
CNN:
Three years of strict pandemic controls in China and a real estate crash have drained local government coffers, leaving authorities across the country struggling with mountains of debt. The problem has gotten so extreme that some cities are now unable to provide basic services, and the risk of default is rising.
Analysts estimate China’s outstanding government debts surpassed 123 trillion yuan ($18 trillion) last year, of which nearly $10 trillion is so-called “hidden debt” owed by risky local government financing platforms that are backed by cities or provinces.
Why it matters.
China’s full recovery requires structural change
While many celebrate China’s “re-opening,” Prof. Minxin Pei, Professor of Government at Claremont McKenna College and non-resident senior fellow at the German Marshall Fund of the United States, says China’s recent U-turn on zero-Covid and business crackdowns is little more than “happy talk,” designed “to restore public support.”
Pei thinks that Beijing has abandoned the domestic policies that have helped drive, both, domestic and global growth for forty years, and that the country’s high debt burden, misallocation of capital, and declining labor force are catching up with it, just as external challenges are wreaking havoc with its influence abroad.
Pei, Project Syndicate:
In terms of economic policy, China must privatize inefficient state-owned enterprises and create a more business-friendly regulatory environment. Measures aimed at supporting small businesses are also essential to a lasting economic recovery.
Despite all the talk about growth, China’s government has not unveiled any such plans. And nothing in official government rhetoric indicates that a fundamental change of direction – like Deng’s decisive break with Maoist “class struggle” in 1979 – is being considered. So, don’t believe the hype: China’s economy may be sputtering for a while yet.
Senior fellow at the Carnegie Endowment for International Peace Michael Pettis seems to agree. He thinks “China’s economic model is in crisis,” and that “COVID did not change the Chinese economy so much as it exacerbated its underlying problems, which are at least a decade old.”
Pettis, NY Mag:
Those problems are most visible in the property sector. But they derive from China’s growth model. That model has two parts. First, through a variety of policies, you increase the share of national income that goes into savings and reduce the share that goes into consumption. In practice, this means restricting the amount of GDP that goes to households and increasing the amount that goes to businesses. Second, you channel those savings through the banking system into investment.
. . . Is it a good model or a bad model? Well, it depends on the underlying circumstances. When China started this, it was among the most underinvested economies in the world. After five decades of anti-Japanese war, civil war, and Maoism, it was hugely underinvested. So this model was exactly what it needed. Opportunities for productive investment were abundant.
But the trouble with a very successful development model is that, by definition, it resolves the problems it was created to address. A good development model renders itself obsolete. And yet, if such a model eliminates its animating purpose, it does not eliminate the interest groups who’ve come to benefit from it.
Double-digit Chinese growth is gone
Aljazeera’s Liam Gibson last week reported that “China’s double-digit growth era is almost certainly over,” and that “[t]he growth rate that China does manage to sustain in years ahead will largely depend on how Beijing adapts to the structural challenges facing its economy and the impact of Xi’s new priorities.”
Gibson says experts tell him that “[t]he slowing of the Chinese growth engine will impact everyone, though not in the same way.”
Gibson, Aljazeera:
Many countries, especially those who have come to rely on China as their major export destination, will feel the drop in demand acutely. The speed at which countries can pivot to other faster-growing emerging markets, such as in India and Southeast Asia, will largely determine the winners and the losers during this transition.
The slowdown will also influence the geopolitical power balance. If China peaks economically in the coming decade, its dream of surpassing the US as the world’s biggest power will appear less inevitable. Such a scenario could prod Beijing into taking bolder actions on what it perceives as its “core interests” – such as Taiwan’s status – while at the zenith of its power, experts have warned.
Economists predict turmoil within China too.
Council of Foreign Relations’ Zongyuan Zoe Liu and Daniel Stemp also cautioned that “[w]hen considering the economic security of Chinese households, it is important to note that for 43 percent of the population that is thirty-five years old or younger (roughly six hundred million people), the past year represents the most trying period of economic stress and instability they have ever personally encountered.”
CFR:
In December the unemployment rate stood at 5.5 percent, down from 6.1 percent in April but still well above the historical average. The youth unemployment rate (workers aged sixteen to twenty-four) was 16.6 percent in December, down from its July peak but still above the 2021 average of 14.2 percent. While the easing of COVID-19 restrictions will help to bring that number down further, it may take a couple of months before we see substantial positive effects. In early January, many migrant workers returned to their rural homes for the Spring Festival, and they may be slow to return to the cities without clear prospects for employment.
Even if the unemployment rate returns to pre-pandemic levels, it is uncertain whether Chinese households’ confidence in the economy will ever return to the same unbridled optimism that characterized the prior two decades.
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