Post-‘zero-COVID’ economic recovery and the problems facing China

by Linda Huang Staff Writer

Following the onset of the COVID-19 pandemic, China’s economy incurred consistent downward economic trends as a result of President Xi Jinping’s stringent “zero-COVID” policy. Many foreign firms considered leaving China, factory activities were severely reduced, workers were laid off and the entire economy only saw a mere 3% growth during the entire year of 2022 — the second slowest growth rate since 1976. However, with the abandonment of the “zeroCOVID” policy and the recent reopening of the country in the final months of 2022, China has made various attempts to revitalize its lackluster economy and return to its pre-pandemic economy.

The People’s Bank of China has adjusted many aspects of its expansionary monetary policy in the hopes of injecting more money into the economy through boosting consumption. For instance, China announced a cut in its reserve ratio last November, which allowed more funds to be loaned out and in turn increased the money in circulation and lowered the interest rate for loans, thereby incentivizing more firms to invest and increasing production. This is especially beneficial in China’s situation; amid stringent COVID-19 regulations that forced many firms to shut down, this increase in production will reinstall a certain level of nominal output. Moreover, the reduced costs of borrowing as a result of an increase in money supply may stimulate consumption among households. This would incentivize those in the ailing sectors to take out more loans, such as mortgages to purchase new housing, thus revitalizing economic activities. Traditional economics would suggest that this is particularly beneficial during times of economic downturn like what China is experiencing right now, where credit markets are tight and businesses and households struggle to access loans.

While Xi expressed in his New Year’s address in December 2022 that China’s economy exhibits “strong resilience, tremendous potential and great vitality,” pragmatic concerns facing China suggest that recovery may not come as easily as expected by Chinese economic analysts. While monetary measures that boost consumption would be efficacious in theory, they may not necessarily lead to sustained economic growth. It will be difficult to bring up consumption after the general public was forced into three years of tight savings due to sluggish economic growth caused by the “zeroCOVID” policy. Consecutive years of lowered income have made consumers more riskaverse; they are highly skeptical with their purchases and less inclined to buy at a pre-pandemic rate. Moreover, the years-long “zero-COVID” policy caused tremendous harm to the factors of production needed for real economic growth. Due to forced lockdowns, many supply chains were disrupted, thus reducing the efficiency of the manufacturing sector and in turn reducing production capacity — a crucial variable that represents the economy’s highest potential output. To fully increase real gross domestic product and restore China’s pre-COVID-19 output levels, the Chinese government must go beyond implementing expansionary monetary policies such as reserve ratio cuts and switch gears to focusing on the enhancement of factors of production, such as labor, human and physical capital and technology. This will bring out long-term growth and truly allow the Chinese economy to recover.

The most arduous task, however, is rebounding back to pre-pandemic foreign investment levels and restoring high levels of external demand, both of which fell short during the pandemic. Facing temporary shutdowns, which the local government often imposed as a “zero-COVID” protocol, foreign firms suffered detrimental loss- es and thus eventually shifted investment focus to Southeast Asia. While it is relatively easier to implement efforts to stimulate internal demand and domestic consumption, China needs to cultivate high levels of confidence and increase expectations in order to re-attract foreign investors to the market. Nevertheless, the recent opening still marks a hopeful start for economic recovery. With the removal of its draconian travel restrictions for international travelers, which required a week of hotel quarantine followed by three more days of home quarantine, China expects its airlines’ profitability to soar. This is also a positive sign for the Chinese tourism industry, which constituted a huge portion of China’s service sector revenue prior to 2020. Although rapid economic growth may not occur in the immediate aftermath of the reopening, China has been taking important preliminary steps that are necessary for it to eventually bounce back to its pre-pandemic economy.

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