China experiences ‘economic long COVID’; expert claims it refuses to employ the sole remedy for growth.

China experiences 'economic long COVID'; expert claims it refuses to employ the sole remedy for growth.

China’s “Economic Long COVID” and the Lingering Effects on its Economy

image

China’s economy has been suffering from what can be compared to the ongoing symptoms of COVID-19, leaving it weak and struggling for the long term. This analogy was drawn by Adam Posen, president of the Peterson Institute for International Economics. In an article for Foreign Affairs, Posen explained that China’s economic rebound after the initial COVID-19 outbreak has been disappointingly sluggish, and financial markets have not fully grasped the extent of the difficulties the country is facing.

After strict zero-COVID lockdown measures were lifted at the end of 2022, expectations were high for a rapid and robust recovery. The first quarter showed a glimpse of this, but subsequent growth in various sectors, including manufacturing, consumption, exports, and investments, dropped off drastically. Compounding these challenges are the ongoing debt turmoil and the struggles in China’s massive real estate sector.

Despite these setbacks, growth forecasts for the country remain relatively optimistic, albeit lower than earlier projections. Bank of America and Goldman Sachs have trimmed less than a percentage point from their 2023 forecasts. The International Monetary Fund predicts 4.5% growth in 2024, while the Organization for Economic Cooperation and Development foresees a more positive 5.1% outlook.

However, according to Posen, China’s economic woes extend far beyond the pandemic. They stem from Beijing’s increasing intervention in the economy as it tightens its grip. In authoritarian regimes, economic development tends to follow a pattern: an initial period of growth fueled by politically compliant businesses and government support, followed by increasingly arbitrary intervention by the regime. This intervention leads to uncertainty and fear, causing households and small businesses to prefer cash savings over investments. As a result, sustained growth declines.

President Xi Jinping’s extreme response to COVID-19 has made the public immune to major intervention, resulting in a less dynamic economy. China’s Communist Party, which was relatively hands-off in previous decades, has significantly increased its control over the private sector, especially during the zero-COVID era. The abrupt end to this policy will not revive growth since it demonstrated that the economy is at the mercy of the party and its unpredictable decisions.

The lingering effects of China’s economic long COVID are evident in the behavior of its people. Faced with uncertainty, individuals opt to hoard cash and spend less on assets that aren’t easily convertible to cash, such as cars, business equipment, and real estate. Sadly, there is no reliable cure for this systemic condition. Credibly assuring ordinary Chinese people and companies that there are limits on government intrusion into economic life seems nearly impossible.

Any stimulus measures taken by Beijing are unlikely to produce the desired results as consumers remain wary of further disruptions. Despite efforts by the central bank to cut interest rates and pledged stimulus in recent Politburo meetings, there has been little improvement in economic activity.

Posen also cautions against celebrating China’s economic downturn as good news for its rivals. When the next global recession arrives, China’s growth will not be able to help revive demand abroad as it did in the past. Western officials should adjust their expectations downward but not celebrate too much, as the interconnectedness of the global economy means that China’s economic struggles could have negative repercussions worldwide.

In conclusion, China’s economy is experiencing a case of “economic long COVID,” characterized by lingering weakness and sluggishness. Despite relatively optimistic growth forecasts, the underlying challenges are rooted in Beijing’s increasing intervention in the economy. The lack of confidence in the government’s intrusion and unpredictable interventions has led individuals and businesses to hoard cash, resulting in reduced investment and growth. As the global economy remains interconnected, the implications of China’s economic struggles extend beyond its borders, warranting caution and thoughtful consideration from Western officials.