How will China turn its economy back on? The world is about to find out

Spending by consumers in China is unlikely to reawaken swiftly after being smothered for so long, analysts say. PHOTO: EPA-EFE

SHANGHAI — For months, investors and chief executives waited anxiously for China to ease up on its Covid-19 restrictions, which burdened the economy and were out of sync with the rest of the world. Stock markets rallied on mere rumours of policy changes. Companies warned that “zero Covid” was hurting business.

Now that China has finally started rolling back its strict mix of mass testing, lockdowns and quarantines, its economy is entering a delicate period when it will face a set of challenges that do not fit neatly with other countries’ experiences during the pandemic.

Spending by consumers is unlikely to reawaken swiftly after being smothered for so long, analysts say. China faces a severe downturn in housing and must race to vaccinate more of its population, especially seniors. China’s factories confront weakening demand from key trading partners like the United States and Europe, both of which are staring down possible recessions.

The road map for the next several months is highly uncertain.

“China’s economy has been hobbled in ways we really don’t understand,” said Mr Han Lin, China country director in Shanghai for the Asia Group, a Washington consulting firm.

In the West, economies recovered quickly when households were freed from pandemic restrictions. Many workers had saved their pay cheques while working from home and also socked away government assistance cheques. When the threat from Covid-19 receded, consumers began eating out again and snapped up airline tickets and hotel rooms.

China’s management of its pandemic economy has been completely different.

Mr Ryan Lam, a 30-year-old marketer in Guangzhou, went out for several meals to celebrate the end to that city’s repeated lockdowns. But he is switching back to eating at home to save money. His goal is to put aside half his salary.

“Private companies have been cutting spending,” he said. “The pandemic is like a catalyst, making my worries worse.”

As recently as last spring, supply disruptions caused by regional lockdowns were the main problem facing China’s economy. But except for some high-profile cases – notably the giant Foxconn facility in Zhengzhou, which makes Apple iPhones and has lost revenue because of unrest by workers fed up with lockdowns – many companies have adapted to “zero Covid”. Supply chain bottlenecks have eased, with freight container rates from Shanghai to the US West Coast plummeting.

“Major companies are really back to normal operations as far as supply chains are concerned,” said Mr Eric Zheng, president of the American Chamber of Commerce in Shanghai. “They’re more concerned about consumer sentiment – people are less willing to spend.”

Then there is the continuing spectre of health crises caused by Covid-19. Reopening in the West tended to happen after most of the population had been vaccinated with booster shots and highly effective mRNA vaccines, had caught the virus, or both. But that is not true in China.

Less than 1 per cent of the population has been infected with Covid-19, according to official data. Most of the population have been vaccinated, but only with China’s domestic vaccines, which use an older technology that has been found through testing in other countries to be less effective. People older than 80, who are most at risk, have the lowest rate of vaccination.

Remote video URL

Doctors in China predict that 80 per cent or 90 per cent of the country’s people could become infected in the coming weeks and months – a wave of illness that may make consumers reluctant to go out and spend money.

Households in China also do not have a lot of free cash to spend. The US, Hong Kong and various European governments supported consumer spending during the first two years of the pandemic by sending out large cheques or providing generous assistance to the unemployed. That helped many families build up their savings.

Not China. Except for a few small municipal programmes, which distributed coupons for local spending, the Chinese government did not distribute supplemental payments to households. Beijing preferred instead to spend heavily on infrastructure construction and on industrial subsidies – policies that benefited Communist Party constituencies in local governments and state-owned companies.

China’s government pressured businesses not to lay off workers. But overtime hours disappeared, wiping out what is often half or more of a pay cheque. And many companies stopped hiring. Youth unemployment is nearly 20 per cent.

Mr Xi Jinping, China’s top leader, called this week for more economic stimulus and a loose monetary policy, effectively telling the central bank, the People’s Bank of China, to keep injecting money into the financial system. That would make it easier for companies and home buyers to borrow. But corporate demand for loans has been weak, while a nationwide problem of insolvent property developers and unfinished apartments has pummelled home sales.

Chinese households have two-thirds or more of their savings tied up in real estate and fairly little in the stock market – an unusual allocation by international standards and making them less likely to profit from central bank stimulus the way many families in the US did.

The bank deposits of Chinese families rose somewhat during the pandemic because they were spending less than usual, said Ms Louise Loo, an economist in the Singapore office of Oxford Economics. But households deposited much of that money into higher-interest bank accounts that restrict withdrawals for months or even years, making it hard for families to spend more money even if they had the confidence to do so.

Living patterns for seniors are also different in China. That could further limit consumer spending in the months to come.

In Western countries and even in Hong Kong, many seniors stay in nursing homes and other assisted-living arrangements, which limited visits during outbreaks of the virus. But multigenerational living is much more common in China. The presence of an older family member, often unvaccinated, is a formidable check on the ability of other family members to start dining out and spending money because of the potential for infection.

“It also means we might continue to see lockdowns in residential buildings,” Ms Loo said.

One of the hardest-hit business sectors in China has been travel. Hotels have been practically empty as cities imposed stringent rules on intercity travel, forcing them to cut room rates by half or more to lure a few local residents for “staycations”. Domestic air and rail travel has fallen steeply, while international air travel has been almost completely shut down since March 2020.

It is unclear when China might open its borders to international air travellers. A new policy on Wednesday to ease intercity movement may increase spending but also spread illness. NYTIMES

Join ST's Telegram channel and get the latest breaking news delivered to you.