For months, investors and CEOs waited anxiously for China to ease its Covid restrictions, which weighed on the economy and were out of sync with the rest of the world. Stock markets rallied on sheer rumors of policy changes. Businesses warned ‘zero Covid’ is bad for business.
Now that China has finally begun to ease back on its stringent mix of mass testing, lockdowns and quarantines, its economy is entering a delicate period in which it will face a range of challenges not exactly like what other countries have been experiencing during fit the pandemic.
Consumer spending is unlikely to rekindle anytime soon after being stifled for so long, analysts say. China faces a severe contraction in the housing market and must scramble to vaccinate more of its population, particularly the elderly. China’s factories, the engine of the country’s trade with the world, are facing flagging demand from key trading partners like the United States and Europe, both of which are eyeing possible recessions.
The roadmap for the next few months is highly uncertain.
“China’s economy has been shaken in ways that we really don’t understand,” said Han Lin, country director for China in Shanghai for Asia Group, a Washington-based consulting firm.
In the West, economies rebounded quickly as households were eased from pandemic restrictions. Many workers had saved up their paychecks while working from home and pocketed government benefit checks as well. As the Covid threat eased, consumers started eating out again, snapping up airline tickets and hotel rooms.
China’s management of its pandemic economy has been radically different.
Ryan Lam, a 30-year-old marketer from Guangzhou, ate out several times to celebrate the end of that city’s repeated lockdowns. But he’s switching back to eating at home to save money. His goal is to set aside half of his salary.
“Private companies have cut spending,” he said. “The pandemic is like a catalyst that amplifies my concerns.”
Supply disruptions caused by regional lockdowns were the main problem for China’s economy last spring. But with the exception of a few high-profile cases – notably the huge Foxconn plant in Zhengzhou, which makes Apple iPhones and has lost revenue due to unrest from workers tired of lockdowns – many companies have adapted to “zero Covid”. Supply chain bottlenecks have eased and freight container prices from Shanghai to the US west coast have fallen.
Understand the protests in China
“Large companies have really gone back to normal in terms of supply chains,” said Eric Zheng, president of the American Chamber of Commerce in Shanghai. “They’re more concerned about consumer sentiment — people are less willing to spend.”
Then there is the lingering specter of health crises caused by Covid. Reopening in the West has typically come after most of the population has had booster shots and high-potency mRNA vaccines have caught the virus, or both. But that’s not true in China.
According to official figures, less than 1 percent of the population has contracted Covid. Most of the population has been vaccinated, but only with China’s domestic vaccines, which use older technology that tests in other countries have shown to be less effective. People over 80, who are most at risk, have the lowest vaccination coverage.
Doctors in China are predicting that 80 or 90 percent of the country’s population could become infected in the coming weeks and months – a spate of illness that may keep consumers from going out and spending.
Many retail stores have closed, leaving fewer places for anyone to spend money anyway.
Some of China’s most famous shopping streets, like Shanghai’s Nanjing Road, are still lined with elegant window displays of international brands. But just a short walk away, many of the storefronts are now boarded up — and long rows of shops have already closed at a sprawling mall across the Huangpu River.
Households in China also don’t have a lot of free money to spend. The United States, Hong Kong and various European governments supported consumer spending in the first two years of the pandemic by sending large checks or giving generous support to the unemployed. This helped many families to build up their savings.
Not China. Apart from a few small community programs that distributed coupons for local spending, the Chinese government did not distribute additional payments to households. Beijing instead preferred to spend heavily on infrastructure construction and industry subsidies — policies that benefited Communist Party constituencies in local governments and state-owned enterprises.
China’s government urged companies not to lay off workers. But overtime disappeared, often wiping out half or more of a paycheck. And many companies stopped hiring. Youth unemployment is almost 20 percent.
Xi Jinping, China’s top leader, this week called for more economic stimulus and loose monetary policy, effectively urging the central bank, the People’s Bank of China, to keep injecting money into the financial system. That would make it easier for businesses and homebuyers to borrow. However, business demand for credit has been weak, while a nationwide problem with insolvent developers and unfinished housing has hurt home sales.
Chinese households have two-thirds or more of their savings in real estate and very little in the stock market — an unusual allocation by international standards that makes them less likely to benefit from central bank stimulus, as many families in the United States did.
Bank deposits by Chinese families have risen somewhat during the pandemic because they have been spending less than usual, said Louise Loo, an economist at Oxford Economics’ Singapore office. But households have deposited much of that money into higher-interest bank accounts that restrict withdrawals for months or even years, making it difficult for families to spend more money even if they had the confidence to do so.
Lifestyle habits for seniors are also different in China. That could further constrain consumer spending in the coming months.
In western countries and even Hong Kong, many seniors live in nursing homes and other assisted-living facilities, limiting visits during the virus outbreak. But multigenerational living is much more widespread in China. The presence of an elderly relative, who is often unvaccinated, is a formidable obstacle to the ability of other family members to start eating and spending money because of the risk of infection.
“It also means we may continue to see lockdowns in residential buildings,” Ms Loo said.
One of the hardest-hit industries in China is travel. Hotels were virtually empty as cities imposed strict rules on intercity travel, forcing them to drop room rates by half or more to lure a few local residents into “staycations.” Domestic air and rail travel has fallen sharply, while international air travel has almost completely grounded out since March 2020.
It’s unclear when China might open its borders to international air travelers. A new policy on Wednesday to ease intercity movement may increase spending but also spread disease.
The Beijing city government almost completely banned foreigners from visiting the city this fall. Thousands of Beijing residents who left the city for family visits or work trips have also been unable to return. But despite this precautionary measure, Beijing has seen one of the biggest spikes in infections in China in recent weeks. The end of restrictions on intercity travel will allow residents of Beijing, one of China’s two wealthiest cities, to spend money elsewhere, but at the risk of spreading Covid to other cities.
The problems facing the world’s second largest economy can be seen in the experience of business owner Gong Naimin. Mr. Gong has a small factory making Christmas tree decorations in Yiwu, a center for light industry and export logistics, a four-hour drive southwest of Shanghai. Its sales have faltered as customers struggling with tough Covid restrictions stayed away.
That’s why he hires fewer employees. It’s a small ripple in a nationwide tide of unemployment that has hurt many companies’ sales since its workers are also customers of other companies.
With Christmas approaching, “prime time is over,” he said. “Domestic demand is weak and it’s too late to sell in foreign markets.”
Li You and Joy Dong contributed to the research.
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