China’s great reopening: a bang or a whimper?

10 March 2023

After almost three years in strict COVID-19 isolation, a question many global investors are asking is – will China’s economy start firing on all cylinders once again?

The country may have only reopened its borders back in January, but when China – the second largest engine in the global economy – splutters back into life, the rest of the world will be watching closely.

Many are hoping for a rapid rebound in economic activity. In the article below, we look at the potential key drivers, and examine what’s been going on under the hood as China finally moves away from its controversial zero-COVID approach.

The end of zero-COVID chaos?

With the arrival of vaccines, most countries started phasing out their COVID-containment measures from late 2021, but China was the last major nation to lift restrictions, clinging on to its draconian zero-COVID strategy until December 2022.

China’s rationale was based on the fact that its elderly population, and those more susceptible to the virus, were disproportionately unvaccinated. Its homegrown vaccines also had relatively low effectiveness, especially against new variants. Authorities consistently claimed that the restrictions were only in place to prevent the health service from being overwhelmed, and to avoid a huge spike in death rates.

But after more than a thousand days of pursuing this economically damaging elimination strategy, China abruptly put an end to city-wide lockdowns, mass testing and extensive quarantine, and reopened its borders once again to international travel. The growing level of public dissatisfaction had forced the leadership’s hand. 

And just a few months into China’s great reopening, there are already signs that domestic activity has rebounded from its pandemic-induced slumber, with international supply chains under less stress and global growth prospects benefiting. 

Beijing is also now claiming a decisive victory over the virus, after infections initially skyrocketed following the relaxation of restrictions. Official data suggests that hospitalisations proved manageable and death rates were lower than many feared, although it’s hard to know the full impact of this recent surge due to Chinese government secrecy. 

Back in January, China was also able to celebrate the traditional New Year festival season in style, with family gatherings and crowds the norm once again. It appears the COVID wave plateaued around that time – rather than leading to a new surge, as some experts predicted – with its population now seemingly on a path towards herd immunity status.

China’s recovery gathers pace

Historically, much of China’s rapid economic growth has been attributed to two factors: an expansion of credit, and large-scale investment. Although more recently, there’s been increased reliance on exports and property.

Yet, any quick economic recovery this time around hinges more on domestic consumption. Recent data is promising, suggesting a sharp pick-up in transportation usage and recreational visits. Retail sales are also predicted to recover and grow following last year’s stagnation, although the middle classes could be constrained by rising household debt and slowing income growth. 

However, the balance sheets of wealthy families continue to look healthy. Add in the comprehensive plans by Beijing to shore up an ailing property market, as well as pledges to offer a more supportive monetary and fiscal backdrop – and the stage looks set for a broad-based economic recovery this time around. 

Relief for hard-hit property sector 

China’s embattled real estate market has slumped in the last two years – with investment drying up, developers defaulting on debts, and buyers boycotting their mortgage payments.

And given that the housing market now accounts for a quarter of gross domestic product (GDP), Beijing has been forced to act – announcing a series of measures to prop up the sector. These include support for housing developers and a loosening of restrictions on property purchases – all in the hope of restoring confidence to the market.

There’s likely to be some fragility in the months ahead, although there are some signs of easing – with new homes sales picking up. And there is hope that these new initiatives will be enough to revive the long-suffering property market. But it’s fair to say that China’s real estate crisis isn’t quite over yet.

What next for inflation?

China is unlikely to add much to global inflation this year, despite a slight acceleration in prices after the economy reopened and consumers celebrated the Lunar New Year.

The country has one of the lowest inflation rates in the world, currently bobbing around the 2% mark. A further uptick in domestic demand could see this increase, but chances of a big uplift appear limited. 

The People’s Bank of China is also expected to keep on its loose monetary policy path. After interest rates were cut last year to shore up a slowing economy, policymakers are expected to remain accommodative – unless inflation starts to move ahead of projections, where we could see a more constrained fiscal backdrop.

Geopolitical tensions grow, but hopes remain

Rising geopolitical tension is causing increased friction between China and the West, especially US-China relations.

From trade tariffs to data transparency, and now the furore over the downed ‘spy’ balloons above America, the souring relationship between the two global superpowers could impact growth prospects.

The US, Japan and Netherlands have also agreed to impose certain restrictions on the sale of semiconductor chips to Chinese companies, which can be used in military technology.

Yet, despite all this, trade between the US and China actually grew last year1.

And while diplomatic tensions do exist, China is nevertheless transitioning to a more sustainable, hi-tech and domestically focused economy, which bodes well for investors if it sustains.

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