China at a standstill again

16th January 2023
-IAM, News

Hugues Chevalier, Economist

The Chinese government’s 180-degree turn on Covid health policy in early December is again causing major disruptions to the economy. China has applied a “zero-Covid” policy since the beginning of the pandemic in 2020 with repeated and massive lockdowns causing repeated shutdowns in industry and services. But these “extreme” lockdowns have generated social unrest and growing discontent among the population and businesses. Eventually, the government, without any preparation, changed its policy and completely abolished the restrictions and lockdowns at the beginning of December. The consequences are catastrophic in both health and economic terms. More than 30 million people are infected every day in a context of low vaccination rates and non-existent herd immunity. The health system is completely overwhelmed by the wave of patients, and hundreds of thousands of deaths are expected. Economically, businesses are once again at a standstill due to a lack of ‘healthy’ staff. In the service sector, the situation is similar, with people staying at home for fear of contamination. Investments are at their lowest for 10 quarters and new orders continue to be at their lowest. While a strong recovery in activity is expected at the end of this wave of contamination, its timing may be more distant than expected and would probably not occur until the second quarter. China will face a number of challenges in its recovery. Consumer confidence, which has been badly affected, will recover only slowly. Once it stabilises, households will finally be able to spend their savings accumulated over the past three years, which will boost domestic demand.