Without effective vaccines, China’s economy may not heal

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China’s nearly three-year policy of enacting strict lockdowns to contain Covid-19 outbreaks has taken a heavy toll on the world’s second-largest economy.

The question for its chairman, Xi Jinping, and his domestic court of advisers is whether a sudden easing of lockdown rules introduced this week will prevent a repeat of the shockwave of protests across the country and turn the economy upside down.

In the two days following Beijing’s announced easing of rules, including allowing people with no or mild symptoms to quarantine at home, the signs are only modestly promising.

The lack of effective vaccines and the fact that large parts of the population have had no or fewer vaccines than the three needed for full protection will mean that employers will be faced with a workforce plagued by ill health, possibly affecting production as much as any block.

A worker in protective gear guards the entrance to a neighborhood in Shanghai. Photography: Héctor Retamal/AFP/Getty Images

State newspapers have welcomed the government’s validation of the new vaccines, but little is known publicly about how well they will work.

Meanwhile, reports that pharmacies are already running out of basic medicines like ibuprofen are undermining public trust in the healthcare system and its ability to protect them without lockdowns in place.

However, Xi had little choice when he decided to ease restrictions. Not only were protesters calling for him to step down in unprecedented public outbursts, trade with the rest of the world had collapsed and youth unemployment had soared.

As a measure of the stagnation Beijing is now struggling with, inflation fell to just 2.5% in October and core inflation, excluding volatile items such as energy and food, stands at 0.6%. The almost total lack of domestic inflation reveals an economy stuck in a neutral position.

Export data last month showed that exports had contracted by 8.7% from a year earlier, a much larger decline than the 6.7% expected by analysts and the 0.3% drop in October . Imports also fell sharply by 10.6% from a 0.7% drop in October as domestic demand for imported soybeans and iron ore eased.

The head of the International Monetary Fund, Kristalina Georgieva, said last month she may have to cut her forecast for China’s economic growth without a review of Covid restrictions. Prior to her comments, the IMF had forecast that China’s gross domestic product (GDP) would grow by 3.2% this year and 4.4% in 2023.

Beijing’s Covid control reforms announced on Wednesday also included adjustments to the duration and scope of lockdowns, with cities only required to close affected apartments and floors, rather than entire city blocks.

Health officials still warn that trends in deaths will be monitored closely and reserve the right to introduce tougher measures if needed.

However, Xi said local governments should not use the previous “one size fits all” approach and health authorities can adopt the same flexible policy.

Beijing restaurants restore food services as China eases Covid restrictions.

Beijing restaurants restore food services as China eases Covid restrictions. Photograph: Wu Hao/EPA

Julian Evans-Pritchard, a senior China economist at consultancy Capital Economics, said the shift in sentiment in Beijing was unlikely to prevent further declines in the coming quarters, limiting a recovery to the second half of next year.

“Outbound shipments will get limited boost from the easing of [China’s] virus restrictions, which are no longer a major constraint on manufacturers’ ability to fulfill orders,” he said.

“Accordingly, the decline in global demand for Chinese goods will be much greater due to the reversal of demand in the era of the pandemic and the imminent global recession.”

As an example of the hit to individual companies, Apple supplier Foxconn said November revenue fell 11.4% year over year, following production issues related to Covid-19 controls at the largest iPhone factory in the United States. world in Zhengzhou. As a result, the iPhone 14 is expected to be in short supply this Christmas.

Albert Edwards, a global strategist at Société Générale, said China’s central bank is likely to stimulate the economy with cheap money, in part to boost consumer and business spending and offset the impact of the recession across most of the world. industrialized world.

Ali Jaffari, head of North American capital markets at Validus Risk Management, said a 10% plunge this year in the value of the yuan indicates the difficulties facing China’s economy.

“China’s economic outlook remains vulnerable as the state continues to experience sluggish growth. The housing market is in a crisis, manufacturing and production levels are falling below estimates and export demand is waning,” she said.

The central bank’s attempts to increase borrowing, including reducing the amount of liquidity banks must hold as reserves and easing lending limits to bail out the housing sector, were unlikely to have had much effect, he added. Jaffari, even as financial markets were buoyed by the easing of restrictions, sending the stock market higher.

Promoting a more optimistic message on the day that Covid controls were eased, Chinese state media reported that a high-level meeting of the ruling Communist Party’s politburo had stressed that the government’s focus in 2023 would be to stabilize growth. , promote domestic demand and open up to the outside world.

That may prove enough to get the IMF to stick with its 2023 forecast, but without more effective vaccines, lockdowns should continue in China when the rest of the world has moved on, limiting growth for some time.

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