As China moves away from zero-Covid, what will the economy look like in 2023?

Hong Kong

As China moves ever closer to fully exiting its three-year government-imposed Covid isolation and reintegrating with the world, economic expectations are high.

Beijing’s tough zero-Covid strategy – which has long stifled businesses – is expected to revive the world’s second-largest economy next year.

Covid lockdowns and border restrictions have put China out of sync with the rest of the world, disrupting supply chains and hurting trade and investment flows.

With the global economy currently facing significant challenges, including energy shortages, slowing growth and high inflation, China’s reopening could provide a much-needed and timely boost.

However, according to economists, the process of reopening the country’s economy in the first few months of 2023 will be difficult and unstable and painful.

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

Bo Zhuang, senior sovereign analyst at Loomis, Sayles & Company, Boston, said: “In the short term, I believe China’s economy will experience more chaos than progress for one simple reason: China is poorly prepared to deal with Covid.” capital investment company.

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

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

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

There are few customers at a shopping mall in Suqian, Jiangsu Province, China, 26 December 2022.

“At the initial stage, I believe that the reopening could trigger a wave of Covid cases that could overwhelm the healthcare system, reducing consumption and production in the process,” Zhuang said.

Already, the rapid spread of the infection has forced many people into lockdown, emptying shops and restaurants. Factories and companies have also been forced to close or reduce production as more workers fall ill.

People line up to buy free ibuprofen tablets to reduce fever at the flagship store of a national pharmacy chain in Hangzhou, east China's Zhejiang province, Dec. 28, 2022.

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

They expect China’s economy to contract by 0.8% in the first quarter of 2023 and rebound in the second quarter.

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

China’s haphazard reopening isn’t the only factor driving the economy. In 2023, experts will continue to watch how policymakers try to fix the ailing real estate sector, which accounts for about 30% of the country’s GDP.

The crisis in the industry – which began in late 2021 when several high-profile developers defaulted – has delayed or halted the construction of pre-sold homes across the country. This has led to a rare outcry from homebuyers this year who refused to pay mortgages on unfinished homes.

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

In the first 11 months of this year, property sales decreased by more than 26% by value. Investment in the sector decreased by 9.8%.

At a key policy meeting earlier this month, senior leaders pledged to focus on strengthening the economy next year, proposing new measures to improve the property sector’s finances and boost market confidence.

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

“This should give homebuyers enough confidence to boost sales by the middle of next year.”

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

Trade fueled much of China’s economic growth earlier this year, as exports were boosted by rising commodity prices and a weak currency.

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

Last month, shipments from China fell 8.7% from a year earlier, worse than October’s 0.3% decline. This marked the worst performance since February 2020, when China’s economy came to a standstill amid the initial 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 recovered much of their pandemic-era boom,” Capital Economics analysts said.

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

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