If it was not clear before COVID-19 hit, it is now clear that Xi Jinping, China’s top leader, does not value economic growth above social and political factors. In fact, growth appears to be lower on China’s agenda than it has been in several decades. We can conclude this as China is still following a zero COVID policy despite the easing of COVID-related restrictions in the West.
To some extent this makes sense, as China remains vulnerable; 38 percent of its population over the age of 60 have not been fully vaccinated, and Chinese inactivated vaccines have been shown to be less effective than mRNA vaccines developed in the West. scientists have strongly encouraged China will use alternative vaccines. Still, COVID-19 has affected China’s economic growth, with no end in sight. This underscores China’s transition from a nation trying to keep up with its East Asian neighbors and Western counterparts to a more introspective and less market-oriented society.
China’s growth slowdown due to COVID-19 lockdown policies has been well recorded in the media. In recent months, as major cities went into lockdown, China’s economy faced sharp declines in GDP growth, falling 2.6 percent in the second quarter of this year. This represented the slowest growth since the pandemic began. Production decreased and logistics companies faced challenges in carrying out daily activities. In fact, one Hong Kong-based economist estimated that the lockdowns cost China 3.1 percent of GDP per month, assuming the cities that contribute the most to GDP are quarantined.
In the third quarter, there were some closures during July in Lanzhou, Wugang, parts of Shanghai and Wuhan, and elsewhere. While lockdowns weren’t as widespread in July as they were in the second quarter, cities are on alert for new cases, and increases in the prevalence of COVID-19 cases could result in larger lockdowns at any time.
China’s zero-COVID policy is an extreme reversal of policies that were intended to foster growth in the 1990s and 2000s, even at the expense of the environment and the well-being of the workforce. While this trend of encouraging growth at any cost continued somewhat into the 2010s, it now appears that it is no longer expected.
In addition, Chinese households that, until COVID-19 hit, had been trained to buy more and keep up with their peers in developed countries in appearance and lifestyle have seen their ability to buy goods and services has been severely restricted by the lockdown. Consumers were limited in their ability to access stores and even get deliveries online during the lockdown, resulting in sharp drops in consumption. This is an interesting phenomenon, as Chinese leaders have repeatedly called on households to consume more and more to boost the economy. However, now this eminent political goal has taken a backseat to ending the spread of COVID-19.
Unfortunately, this trend looks set to continue. This is because companies, worried about the possibility of China entering a harsh lockdown mode again, are investing and hiring less. This will mean lower or stagnant incomes for existing workers and less employment, which is particularly problematic for young people today.
Foreign companies are also cutting investment to lower levels and expect lower revenues due to the prospect of ongoing lockdowns, with some looking to diversify production centers away from China to other Asian nations. A survey reported that almost 60 percent of European companies said they were cutting revenue projections for 2022, which does not bode well for China’s attractiveness to foreign companies. The China that once opened special economic zones to produce goods primarily for export and created a unique environment to house foreign companies is becoming less important to Beijing.
The area Chinese politicians seem really worried about is real estate. China’s real estate market is suffering as house prices fall. What’s more, homebuyers have threatened to default on mortgages on unfinished housing projects across the country, causing extreme cash flow problems among real estate developers already in debt. This issue is important because it has resulted in social unrest, which the Communist Party leaders are quick to quell in order to maintain social stability. To this end, Beijing has ordered banks to bail out property developers. The goal here is not to promote economic reform and growth in this industry per se, but to prevent social disruption.
Zero-COVID China is a different China than the one viewers have become accustomed to. China no longer seeks growth at any price; in fact, it has taken a more extreme and hyper-cautious stance to beat COVID. Lower growth is certainly on the cards, and no one can guess when growth will return to the top of the agenda.