China’s Economy Struggles as Global Demand Wanes
China’s strict lockdowns to contain Covid-19 outbreaks over the past nearly three years have had a significant impact on the country’s economy. It remains to be seen if the recent relaxation of lockdown rules, including allowing people with mild or no symptoms to quarantine at home, will both prevent protests and boost the economy. While there are modest signs of hope, the lack of effective vaccines and the fact that much of the population has not received all three doses needed for full protection could lead to a workforce plagued by ill-health, potentially affecting production as much as any lockdown.
State-run newspapers have welcomed new vaccines being validated by the government, but little is know publicly about how well they will work. Reports of pharmacies running short on basic medications such as ibuprofen have caused a loss of trust in the health system and its ability to protect the population without lockdowns in place.
China’s President Xi Jinping had little choice but to ease restrictions due to protests, a decline in trade with the rest of the world, and rising youth unemployment. Inflation in China has dropped to 2.5% in October and core inflation, excluding volatile elements such as energy and food, stands at 0.6%, indicating a stagnant economy. Last month’s export figures showed a contraction of 8.7% from the previous year, a larger decline than the 6.7% forecast by analysts, and imports also fell significantly by 10.6%.
The International Monetary Fund has warned that it may have to revise its forecast for China’s economic growth without an overhaul of Covid restrictions. Previously, the IMF predicted China’s GDP would expand 3.2% this year and 4.4% in 2023. The recent reforms to Covid control measures in Beijing also included adjustments to the duration and scope of lockdowns, allowing cities to close off only affected apartments or floors rather than entire city blocks.
Health officials will continue to closely monitor trends in fatalities and reserve the right to implement stricter measures if necessary, but local governments are encourage to adopt a flexible approach rather than a “one-size-fits-all” policy.
It appears that the Chinese economy is facing challenges due to a downturn in global demand for Chinese goods and production problems related to Covid-19 controls. The value of the yuan has also declined by 10% this year, indicating difficulties faced by the economy. Some experts believe that the Chinese central bank may stimulate the economy with cheap money in order to boost consumer and business spending and offset the impact of recession in other parts of the world.
However, attempts by the central bank to boost borrowing, such as cutting the amount of cash that banks must hold as reserves and loosening financing curbs to rescue the property sector, may not have a significant impact. Despite these challenges, the Chinese government has indicated that its focus in 2023 will be on stabilizing growth, promoting domestic demand, and opening up to the outside world.