China’s Road to Reopening

The Chinese government has quickly changed course. After months of enforcing a zero-COVID-19 program that stymied growth, China has dramatically loosened restrictions on its population. In my view, the recent wave of COVID-related protests, driven by an elevated youth unemployment rate of 18%,[i] played a critical role in accelerating the government’s timetable. I believe China would have eased up on restrictions eventually, but the students’ activism convinced the government that the economic and political costs of the lockdowns had become intolerable.

As the second-largest economy in the world, China’s reopening has important economic and market implications, both in the country and beyond. Here are some key considerations.

A disorderly but potentially remarkable recovery

In the short run, I believe China’s economy is likely to experience chaos rather than progress for a simple reason: China is poorly prepared to deal with COVID. Prior to lifting the zero-COVID policy, more than 90% of the Chinese population had not been infected with the virus.[ii] Though vaccination rates are high, rates among the elderly are lower than the overall population, and there are few intensive care unit beds relative to the size of the population. China’s ICU capacity is around 10% of what is available in the US.[iii] On top of all that, China relies on a vaccine that is less effective than the mRNA vaccines commonly used in the rest of the world.[iv]

In the initial phase, I believe the reopening may unleash a wave of COVID cases that could overwhelm the health care system, dampening consumption and production in the process. Policymakers aren’t likely to enforce widespread lockdowns, but factory production may experience some supply disruption. It would not surprise me to see growth rates as low as zero over the next three months, down from the current pace of around 2% year over year.

After the first few months, I think the story will improve as the health crisis eases. The government is already taking measures to speed that outcome by stepping up its campaign to boost vaccination rates for those over 60. I expect Chinese growth to recover by the second quarter of 2023 and top 5% in the second half of the year.