China is currently experiencing its worst Covid-19 outbreak since 2020, with a record number of new daily cases. While on 11 November, authorities announced “20 measures” to ease (at the margin) the zero-Covid policy, the sanitary situation forces the continuation of severe restrictions. Although China was deemed successful in dealing with the Covid-19 pandemic through 2020 and 2021 and public opinion generally accepted the restrictions so far, recent catalysts both domestic and external led to protests taking place across the country. Authorities in China are now facing a difficult choice that many countries have had to make since 2020: between the sanitary cost that comes with easing restrictions, and the economic cost of continuing with zero-Covid.
Françoise Huang
Covid policy change
On the one hand, reopening would be synonymous with a spike in death toll and a serious strain on ICU capacities, according to a study published in Nature[1]. Indeed, the Omicron variant presents a mortality comparable to previous waves for non-vaccinated people. In China, the vaccination rate of vulnerable populations is insufficient (less than 70% of older than 60 have received booster shots, and just 40% for 80+), and acquired immunity is non-existent (given low overall infection rate). In addition, the health system is not prepared for the influx of severe cases and the Chinese population is not particularly young or healthy. The example of Hong Kong at the start of 2022, when the death toll spiked, is on everyone's mind.
On the other hand, further lockdowns would aggravate the economic cost. In November, more than half of China’s GDP saw an acceleration in the number of Covid-19 cases, which induced a -11% y/y decline in mobility during the month. These numbers compare with 20% of GDP and -7% y/y in mobility in March-April, the previous serious wave of infections and lockdowns. Ongoing protests also suggest that at least some parts of the population are not ready to go through severe restrictions again. We think that the protests are likely to subside in the coming weeks, as a result of enforced controls from authorities and possible inflections in the sanitary policy.
Chinese policymakers will probably double down on efforts and incentives to vaccinate vulnerable populations. As soon as on 29 November, the National Health Commission announced a plan to accelerate the inoculation of elderly people. Another measure could be to selectively reopen cities with high vaccination rates, or for people who have received three doses of vaccines. Some cities (including Guangzhou and Beijing) have already begun to ease restrictions (reducing PCR testing, allowing home quarantine, etc), despite a high number of new cases every day.
Economical impact
Economically, what do such concessions mean? In the short run, the risk of disruption coming from prolonged city-wide lockdowns is significantly reduced. That being said, the Chinese economy is not switching to “living with Covid” either, and the coming winter months are still likely to be difficult. There is a high probability of negative q/q growth in Q4 2022, followed by soft growth in Q1 2023. Further ahead, our assumption that zero-Covid starts to be visibly eased from Q2 2023 could be brought forward by 1-2 months. This means that the post-Covid rebound could start to be felt a little earlier in the second half of next year, and into 2024. Our full-year projection of China’s GDP growth forecast is likely to be in the 4-4.5% range in 2023, and 4.7-5.2% range in 2024 (after a little less than 3% in 2022).
Influence on other countries
What are the consequences for the rest of the world? In recent months, the Chinese economic deceleration, against the backdrop of an unprecedented real estate crisis, has contributed to deflating prices. In the short term, the Chinese consumer will not save the world as in the past, but will not create additional inflation either. In 2023, the stimulus measures should help stabilize demand, but what will really be a game-changer will be the abandonment of the zero-Covid policy. After a few more quarters of difficulties, the rest of the world could benefit from a full return of the Chinese consumer in 2024.
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