As China moves ever closer to fully reemerging from three years of government-imposed Covid isolation and reintegrating with the world, economic expectations are high.
Covid lockdowns and border curbs have left 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 process of reopening is likely to be erratic and painful, according to economists, with the country’s economy in for a bumpy ride in the first few months of 2023.
“In the short run, I believe China’s economy is likely to experience chaos rather than progress for a simple reason: China is poorly prepared to deal with Covid,” said Bo Zhuang, senior sovereign analyst at Loomis, Sayles & Company, a Boston-based investment firm.
For nearly three years, China stuck to its zero-tolerance approach to the virus, even though the policy caused unprecedented economic damage and widespread frustration. In 2022, growth slowed sharply, company profits collapsed, and youth unemployment surged to record levels.
While the easing of restrictions is a long-awaited relief for many, the abruptness of it has caught an unprepared public off guard and left them largely to fend for themselves.
“In the initial phase, I believe the reopening may unleash a wave of Covid cases that could overwhelm the health care system, dampening 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 shut or cut production because more workers are getting sick.
“Living with Covid will be more difficult than many assume,” said analysts from Capital Economics.
They expect China’s economy to contract by 0.8% in the first quarter of 2023, before rebounding in the second quarter.
Other experts also expect the economy to recover after March. In a recent research report, HSBC economists projected a 0.5% contraction in the first quarter, but 5% growth overall for 2023.
China’s haphazard reopening isn’t the only factor dragging on the economy. In 2023, experts will continue to watch how policymakers attempt to fix the country’s ailing real estate sector, which accounts for nearly 30% of its GDP.
The crisis in the industry — which started late in 2021 when several high-profile developers defaulted on their debt — has delayed or halted construction of pre-sold homes across the country. That triggered a rare protest by homebuyers this year, who refused to pay mortgages on unfinished homes.
Property sales by value plunged more than 26% in the first 11 months of this year. Investment in the sector fell by 9.8%.
At a key policy meeting earlier this month, top leaders vowed to focus on boosting the economy next year, suggesting they would roll out new measures that improve the financial condition of the property sector and boost market confidence.
“The measures announced so far are not sufficient to drive a turnaround, but policymakers have signaled that more support is on its way,” said Capital Economics analysts.
“This should reassure homebuyers enough to lift sales perhaps before the middle of next year.”
Global recession fears
A potential global recession is another key concern that will shape China’s economic landscape in 2023.
Trade had powered much of China’s economic growth earlier this year, as exports were boosted by rising prices of the country’s goods and a weaker currency.
But in recent months, the trade sector — which makes up around a fifth of China’s GDP and supplies 180 million jobs — has started showing cracks from a global economic slowdown.
Last month, China’s outbound shipments contracted 8.7% from a year earlier, much worse than October’s 0.3% drop. That marked the worst performance since February 2020, when the Chinese economy came to a near standstill amid the initial coronavirus outbreak.
Countries around the world are facing recession as policymakers continue hiking interest rates to combat surging inflation.
“[China’s] exports have already reversed much of their pandemic-era boom,” said Capital Economics analysts.
“But a looming global recession means they probably have further to fall over the next few quarters.”