China’s Economy after Pandemic and Politics

2023 will see a rebound, and a different tone

The pictures China’s President Xi Jinping puts up on his bookshelf during his traditional new year’s speech provide rich food for thought for China watchers. This year, the most prominent new pictures was that of President Xi with his two predecessors Hu Jintao and Jiang Zemin - perhaps to assuage rumours that the unceremonious removal of Mr Hu at the closing session of the 20th Party Congress in October signalled a split in the party. 

Also featured was Xi Zhongxun, Mr Xi’s father, with then-president Jiang Zemin. Xi the elder was a prominent reformer under Deng Xiaoping, who piloted China’s most successful special economic zone, Shenzen. In his speech, President Xi also lauded Mr. Jiang, who died on Nov 30, for the “great legacy” he left behind, perhaps referring to the Three Represents, the notion that entrepreneurs and intellectuals can also be part of the party alongside farmers, workers and soldiers.

Mr. Xi for the first time acknowledged that life under China’s Covid-19 policies for the past three years had been tough: “It has not been an easy journey for anyone.” 

He even seemed to have some reconciliatory words for the protesters against the policies, though some were harassed and interrogated in the aftermath. “Ours is a big country. It is only natural for different people to have different concerns or hold different views on the same issue,” he said, but also stressing that China is a country that draws strength from unity. 

Mr. Xi was rather optimistic on the economy. “The Chinese economy has remained the second largest in the world and enjoyed sound development” he said in his speech, and added: “The Chinese economy enjoys strong resilience, tremendous potential and great vitality.”

This optimism contrasted with the assessment made by the Central Economic Work Conference (CEWC) on Dec 15 and 16 2022. This conference, which brings together economic policy managers and experts from government and party, is important in understanding the policy direction the government will take in the coming year and beyond. While party documents of the Communist Party of China are not known for their introspection of late, the readout of the meeting recognized that not all is well.

“The current basis for my country’s economic recovery is not yet solid, the triple pressure of demand contraction, supply shock, and weakening expectations is still relatively large, and the external environment is turbulent, which has deepened the impact on my country’s economy” the readout stated. The “triple pressures” was also mentioned last year, and the situation has hardly improved since. The main task for 2023 is to “seek progress while maintaining stability”.

Las year was supposed to be one of stability and stable growth, according to the 2021 CECW. That turned out quite different.  The economy was upended by the repeated flare-ups of Covid-19 and subsequent lockdowns, the protracted real estate slump and Russia’s invasion of Ukraine. All played havoc with the 5.5 per cent growth target that was set at the March 2022 National People’s Congress.

With Covid-19 spiking in the past two months, and the world economy cooling off, China should be happy with 3 per cent growth in GDP for the year.

What happens after Zero Covid-19?

The dramatic about-turn in China’s Covid-19 policies will likely be the most decisive event for China’s economy in 2023. The dire state of China’s economy in the last quarter of 2022 no doubt played a major in the decision to change the policy, along with the protests of people frustrated with the baby steps announced in the “20 measures” of Nov 11, a guide to the easing of the Covid Zero Policy.  By that time, the number of infections was probably already out of control.

Of course, with the all-important 20th Party Congress was out of the way, gone too was the political reason to stick to the zero Covid-19 policy.

Though the December 7 “10 points” policy still suggested an orderly exit, this was rapidly overtaken by surging infections, and local governments were left to fend for themselves. No doubt, the abrupt change in policy is causing more casualties, and enormous strains on the medical system, as “China’s Dr. Fauci” Zhang Wenhong said. 

Some of this could have been prevented with better planning by having a vaccination campaign, boosting the intensive care unit capacity, and conducting a more gradual process of opening. But all this now seems water under the bridge, or, as someone put it: “China went from a zero-Covid Policy to zero Covid policy.”

The tsunami of infections currently engulfing China has further depressed economic activity in the final months of 2022. People stayed at home, and many are too sick to work, causing the simultaneous demand and supply shock that many other countries went through in 2020.

China’s December official Purchasing Managers’ Index - an indicator for economic prospects - was in deep contraction territory, and showed its second-lowest reading in history, beaten only by the lows registered during the height of the Global Financial Crisis of 2007-2008.

The situation is fluid, though, and given the speed at which Covid has ripped through the population, things may look up sooner rather than later. Monitoring the Covid-19 situation has become more challenging with the shelving of regular tests and unusual reporting on the number of deaths, which remain miraculously low.

However, data on traffic congestion and metro ridership in the largest cities suggests that the worse of the infection wave is over. This could mean an impending rebound in household consumption, which had dragged down growth last year. Indeed, household savings deposits are overflowing, and some of this will likely be spent once the Covid-19 situation improves.  

Supporting macro policies

After the 20th Party Congress, the Chinese government also moved more aggressively in addressing the property downturn. The supportive measures from the banks have de facto reversed “three-red line” policy to limit borrowing of real estate firms, and it will take time for buyers’ confidence to return.

Moreover, structural factors such as demographics and slower urbanisation may mean that it is indeed different for the sector this time, and that China will end up with a smaller property sector and a very different one than the one now.  

The read-out from the CEWC recognises the importance of stabilising the property sector. The “housing is for living in” mantra is repeated, but the need to stabilise the current market and ensure housing for those who pre-paid for their home is recognised, as is the need for a rental market and low-income housing.

The most recent numbers show a levelling off in the decline in housing sales: in December, sales in the 30 biggest markets was 27 per cent lower than a year before, a slight improvement from the 30 per cent decline registered in November.  Clearly, the sector is not yet out of the woods, but government now seems more committed to prevent it from cratering.

The CEWC promises a continuation of “proactive fiscal policies” and “prudent monetary policies” for this year (2023) - the same as last year. 

Though the dust on 2022 has not yet settled, fiscal policies were again a bottleneck in delivering on domestic demand. The impact of the real estate decline, tax reductions, and weak consumption on local government revenues constrained their spending, despite an increase in central government transfers.

There was also only lukewarm uptake of bonds quota by local governments. Thus, to make fiscal policies truly proactive, major fiscal system reforms are needed, which for now are not on the books.

The promised prudent monetary policy may still be selectively pro-active, as PBC officials put it. Though aggregate demand for credit is likely to constrain monetary expansion in any case, selective support, including for real estate and SMEs will be part of the policy palette. 

Priorities for reform

As for reform priorities, the latest CEWC meeting mentions five: expanding domestic demand; accelerate the construction of a modern industrial system; earnestly implement the “two unwavering” (i.e. support for public and private sector); make greater efforts to attract and utilise foreign capital; and effectively prevent and defuse major economic and financial risks. 

These priorities have a distinctly different tone from the one for last year. First, there is no mention of common prosperity, which was one of the priorities for 2022. 

Second, the tone towards the private sector seems very different from the previous report. The emphasis on state-owned enterprise reforms and the encouragement of foreign direct investment by further reducing the negative list are a departure from 2021 CEWC report, which derided the “barbaric expansion of capital” and spoke of a traffic light system for capital investment, in which the state decided what private enterprises could invest in.

The latest CEWC statement now advocates support for “the development and growth of private economy and private enterprises in terms of policy and public opinion”. 

“Protect the property rights of private enterprises and the rights and interests of entrepreneurs in accordance with the law. Leading cadres at all levels should solve problems for private enterprises, do practical things, and build transparent political and business relations,” it adds.

Even the online platform companies, the bogeymen of the “common prosperity” crowd, are getting a better press: “It is necessary to vigorously develop the digital economy, improve the level of normalised supervision, and support platform companies in leading development, creating jobs, and showing their talents in international competition.” It may still be too early for Jack Ma to move back from Tokyo where he had retreated to after Alibaba’s run-ins with the Chinese government, but the politics seems to have changed.

Indeed, the politics has changed with the 20th Party Congress, with general secretary Xi’s third term in the bag. So perhaps politics is no longer in command of economic policy, and the practical approach that China’s success was built on is seeing a comeback. As the CEWC puts it: “Use practice as the standard for testing the effectiveness of various policies and work.”

This line could be a faint echo of the “Practice Is the Sole Criterion for Testing Truth” article by recently deceased author Hu Fuming. He wrote it in 1978 in the Guangming Daily, amid the battle for post-Mao leadership between Deng Xiaoping and Hua Guofeng, who supported the “two whatevers,” ("we will resolutely uphold whatever policy decisions Chairman Mao made, and unswervingly follow whatever instructions Chairman Mao gave"). Or perhaps this is just my imagination at work.

The CEWC may just be “sweet talking the private sector,” as former editor of the South China Morning Post Wang Xiangwei wrote in his Substack post. The decisions on Covid-19 policy, the real estate market, and the language in the CEWC read-out suggest something more. The proof of the pudding will be in the eating. 

A version of this post has appeared in the Straits Times online