Amidst global economic volatility, China seems to be struggling to maintain its course. Economists have slashed growth forecasts for the mainland, with the most pessimistic hovering at around 2% for 2022, a far cry from the 5.5% Beijing projected earlier this year.
The strongest economic headwind of all is China’s ‘Covid-zero’ strategy. Harsh, targeted yet swift restrictions at the sign of any spike in Covid cases have slowed down economic activity in affected cities. Last week’s announcement on the development of new infrastructure, including the construction of new testing facilities and the expansion of quarantine centres, only confirms Beijing’s unchanging stance. Yet, the mainland’s obstinance is not merely an attempt to flex its political muscle. Because close to half of all Chinese over-80s remain unvaccinated combined with the lower efficacy of the vaccines currently used in China, if the country were to abandon its current course and adopt the approach more common in Europe it risks over a million additional deaths.
The ’Covid-zero’ plan is not the only issue set to cloud the economic outlook in the short-term. The property market crisis has weighed heavily on the economy, given the outsized role that real estate and construction play in total Chinese output – taken together they accounted for approximately 15% of Chinese GDP in 2020[1]. The Chinese property market was a bubble waiting to burst – national house price to income ratios have been above 10 since 2013 while those in Beijing have been above 25 since 2017. Though we expect a return to GDP growth, it is unlikely the property market will recover to its pre-pandemic highs as Beijing tries to avoid another bubble. While other countries typically use macro tools such as interest rates and restrictions on lending to influence the property market, the Chinese authorities have the added advantage of being able to influence micro levers to help them directly micromanage the troubled companies such as Evergrande.
A key trend seen as a result of the pandemic is the growing emphasis on localisation in China. The pandemic accelerated this, with foreign nationals barred from entering the mainland, forcing a shift towards local hires. Indeed, ‘self-reliance’ was highlighted as a top economic priority at the opening of the annual National People’s Congress earlier this year, amidst heightened geopolitical tensions. The data corroborates this point, with China ramping up crude oil production in the first two months of 2022, in light of elevated oil prices[2]. Perceived antagonism from the West does not help either, with the sanctions regime of President Trump and the failure of President Biden to remove these sanctions, all helping to worsen relationships.
While the emphasis on self-sufficiency is perhaps understandable given the international tension of recent years and the added shock of Covid, Beijing must ensure that ‘self-reliance’ does not gradually transform into isolation. History suggests that isolation has not helped China. It started to turn its back on the rest of the world around the 15th century. For a while, this didn’t seem to affect China’s relative prosperity. Indeed, during the 16th century Chinese GDP overtook Indian GDP to make China the world’s largest economy by 1600[3]. But eventually as newer economies pushed ahead, China was hampered by looking inwards and its GDP fell back relative to the new economic powers. The Chinese economy was overtaken by the US during the 1880s and by 1968 China had a GDP less than a fifth of that in the US. China only really started to recover its position as a leading world economy after it opened up again to the outside world in the second half of the 1970s.
Of course, this puts into context the remarkable development China has undergone. But those who manage the Chinese economy should not let their recent success lull them into complacency. Even with a more isolationist policy we still expect the Chinese economy to overtake the US economy measured by $ GDP during the early 2030s. But with other emerging economies still growing rapidly, how long China remains the world’s largest economy will depend not only on China’s internal strengths but also on the extent to which China remains open to influences from elsewhere.
The West and especially Europe will see benefits too by maintaining good relations with China and encouraging a more open Chinese economy, given how many of the problems faced by Western economies, including supply-chain bottlenecks, have been aggravated by the disruptions in China. In fact, if China were to abandon its ‘Covid-zero’ strategy after its national congress in November, as is being suggested by former Australian PM Kevin Rudd (a fluent Mandarin speaker who understands China as well as most Westerners), we believe that there might be an opportunity for an offer from the West that could prove helpful to diplomatic relations.
The West now has substantial quantities of vaccines and is distributing such vaccines worldwide. Would the time be right for a low-key offer for the West to provide such vaccines for China for the Chinese authorities to distribute as they think fit? We could offer to let them distribute the vaccines unbranded so as not to rub in the fact that they have been provided by the West. Our aim here is to help China with its problem, not directly to score points. A generous offer of that kind might well help improve relations, as well as conferring humanitarian benefits.
[2] U.S. Energy Information Administration
[3] Groningen Growth & Development Centre (data for GDP at PPP values)
For more information please contact:
Pushpin Singh, Economist Email psingh@cebr.com Phone 077366 41409
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