The hasty way in which China abandoned its zero Covid policy has spurred debate over the events, including astonishing street protests, leading up to the final decision. Three years of zero Covid – trying to keep infections as close to zero as possible through mass testing, strict rules and lockdowns – and then its unprepared demise in November 2022 will have enduring consequences that will scar China’s economy, labour markets and education sector, and could undermine public trust in the government and even in Xi Jinping himself.
It has been evident for some time that good governance has not been China’s strong point under Xi’s leadership. Pertinent examples include the government’s creation of a financial crisis in 2015-2016, its recalibration of industrial policy to favour the state sector and force private firms to align with the moral, political and social goals of the Chinese Communist Party, its presiding over years of real estate boom and now bust, and the ubiquitous spread of social and income inequality. This week’s report that China’s population fell in 2022 for the first time in 60 years, and is expected soon to fall below that of India, driven by the continuing slump in births, is a reminder that the government also has no national policies for mitigating the adverse consequences of rapid ageing.
The biggest governance failure, and the one which affected the most people directly, however, was the implementation of the zero Covid policy and the abrupt way it was ditched.
We may never know all the facts leading up to the decision to end the policy. Yet we can judge that if the policy reversal occurred under pressure from the virulence of infection and citizen protests, then the government was incompetent for not having prepared the country earlier, only to despair at the inadequacy of its own quarantine system and the lack of resilience in the economy.
With the more infectious Omicron coronavirus variant now believed to be peaking in many of the larger cities that account for much of China’s GDP, the economy could recover quite soon. This would be the case even if the coming Lunar New Year celebrations bring a second wave to smaller cities and rural areas and while death rates remain high. Indeed, tangible economic activity levels, such as subway traffic, flight departures, transportation of goods and electricity consumption in urban areas are already rising from depressed levels in December. By March or April the economy should be thriving again, at least for a while. Though the government was never going to meet its target of 5 per cent GDP growth in 2022, it should be easily done this year, especially with additional stimulus measures and help for the beleaguered real estate sector.
Household deposits grew sharply in 2022 as people spent less and became progressively disillusioned with property; households saved sale proceeds and did not incur new mortgages to compensate. As a result, household spending could soon recover – much as in other countries in 2021 and 2022 – once people are comfortable again with social interactions and activities that entail spending and borrowing. This, in turn, will stabilise investment by companies, and may even lead to a rebound in the property market, where some cyclical recovery is likely in 2023, even if the longer-term trend is weakening.
This bounce-back is going to occur in the context of strong economic headwinds that preceded the pandemic, however, and the zero Covid years only exacerbated these challenges. These include slow growth resulting from China’s over-indebtedness, reduced credit availability, the weakness of local government financing abilities, the structural downturn in the property sector, high levels of income inequality, poor productivity and income formation, a shift from high to low skill in overall employment, and weak governance. China also faces lower global demand for its exports, and a struggle to regain the confidence of foreign businesses.
Social and income inequality, which was already a serious problem before Covid and likely contributed to the November 2022 protests, has undoubtedly been worsened by the government’s pandemic controls from 2020 and now their abrupt end. The vast, if unknown, number of people who were recruited to implement mass testing and enforce the “zero Covid” policy will no longer be required.
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Regardless of the apparent recovery of the economy in 2023, unemployment and limited opportunities for young workers will haunt China for years to come. The much-vaunted tech sector lost over 72,000 jobs in the year to April 2022, and possibly at least 15,000 more by the end of the year. Other policy failures include the continued absence of welfare rights for millions of migrant workers, insufficient efforts to tackle low levels of educational attainment, the persistence of poverty, and the lack of action to meet the needs of an ageing society.
There will be political scars too. The government’s weaknesses, when it comes to good and trusted governance, have been exacerbated by its handling of the pandemic, undermining confidence in public policymaking among hundreds of millions of people across the country.
The Covid protests online and on the streets last year were notable because they were large and spontaneous. The protesters may now have been silenced and will no longer be seen as a threat to the government, but they have had the formative experience of watching a repressive government act to reverse policy under pressure, while still claiming consistency and continuity. The fact that it did so without sufficient preparation or concern for public health and welfare will also be remembered. The rare sight of opposition to the government and to Xi himself may well resurface in the event of future incompetence or insensitivity.
There were also protests in 2022 over the freezing of customer deposits by small banks in Henan, a central province, that were found to have mismanaged assets or committed fraud. As the real estate crisis deepened several hundreds of thousands of mortgage owners in several provinces withheld payments to banks and property developers over uncompleted properties. Many more, less widely reported, protests occur with increasing regularity over grievances such as unpaid wages, dismissal without compensation, and health and safety issues.
If the ultimate goal of the government is to have a compliant citizenry that is beholden to and trusting in the CCP, the last few months have done the opposite. The zero Covid experience has stained the government’s reputation and its status among citizens. Xi’s political status is secure, but his reputation is now clearly flawed.
Beijing is a curious place nowadays, politically. On the one hand one hears positive rhetoric about stimulating consumption and helping private firms. On the other there is the contradictory experience of watching the approach to economic policy and business regulation in recent years. Restrictions over leverage and finance in the property sector are being reversed. Additional credit and liquidity have been provided to property developers, local governments and banks. The regulation of internet and data platforms appears, for now, to have stabilised, although none of the risk management guidelines and enforcement bodies will be terminated. Officials at important ministries, normally pledged to toe the government line, seem to be freelancing in public over preferred economic strategies.
The likelihood is that the Chinese government is doing everything it can to ensure the economy recovers in 2023. China wants its U-turns to give foreign businesses the confidence to pick up where they left off in 2019. On Covid regulations it might make headway, but for the most part, the die of decoupling and detachment from China is already cast.
Over the next few months there will be a lot of focus on the pace of China’s recovery, bringing relief to government officials and investors alike. Yet it is all too likely that this bounce will soon lose momentum and that the pre-existing problems will re-assert themselves, now exacerbated by the scars of China’s zero Covid experience.