China’s transition towards ‘living with Covid-19’ is happening faster than local health experts anticipated when the phased easing of restrictions started in November. It brings forward the onset of a recovery phase to as early as March. The number of infections peaked in January, based on Peking University estimates. The consequent higher immunity levels among the general population mean that secondary waves should have a lesser hit in terms of the number of severe cases, as was the experience elsewhere.
China has made domestic demand expansion – including consumption – the top policy goal this year, whereas last year government officials prioritised containing the virus. The consumption rebound in China will be real, albeit moderate relative to the Covid-19 consumer ‘boom’ in developed economies like the US. The readiness of households for ‘revenge spending’ as curbs are lifted is evident in rebounding cinema ticket sales in January and increased spending on tourism over the lunar new year, both domestically and overseas.
The revival of consumption should help China’s gross domestic product return to potential growth this year of around 5%, after official growth of 3% last year. This will boost global growth, but be significantly inflationary, given that China’s consumption revival will be real but not explosive.
There are four reasons for thinking that China won’t have a consumer boom to the same degree as the US: the design of its pandemic stimulus, its labour market, consumer confidence and the ailing housing market. During the acute phase of the pandemic in 2020-21, the US made huge transfers to households to support consumption demand. By contrast, China focused stimulus on companies and investment, only indirectly supporting households by giving employers tax and financial incentives to maintain payrolls. China didn’t suffer the same kind of mass lay-offs as the US early in the pandemic, but also won’t see the same labour shortages post-pandemic.
Unemployment has risen in China, especially among young people where it is around 17%. Migrant worker jobs are at risk too, with falling exports likely to depress factory jobs. But the offset is that reopening will boost service sector jobs and small- and medium-sized enterprises. The shift of migrant workers to service jobs closer to home has been a medium-term structural issue for manufacturing, leading to labour shortages in the pre-Covid-19 years.
Consumer confidence plunged in China in early 2022, as the Q2 lockdown in Shanghai and elsewhere dragged on. Households saw no end-point for tough restrictions under the zero-Covid policy, with variants becoming more contagious. Once China gets past the exit waves, consumer confidence should gradually rebuild. People will still worry about the economic outlook, but at least one major impediment – zero-Covid policy – is removed.
The housing market faces the prospect of slower recovery than consumption or broad domestic demand, which is a reversal of its usual role. Big cities and high-quality developers should see improving home sales from Q2 onwards, on the back of further policy support – for example, to incentivise upgrader demand. The hundreds of smaller cities will trail behind in a long procession of local market recovery cycles lasting several years.
Early signs of results in developer liquidity support policy appeared in the improvement in bank loan funding for real estate developers in late 2022. The plan is to boost liquidity for high-quality developers, so they can complete projects. This will increase buyer confidence in presale projects by high-quality developers, boosting their sales and thus access to finance. The bank regulators are reported to have given banks criteria to assess which developers are ‘high quality’. This market-based process will be slower than a broad bailout, but deflate financial risks by allowing issues with poor-quality developers to be resolved one way or another.
With this policy context, buyers are likely to be more picky about developers and markets. This means a slower recovery. At the same time, it is worth remembering that the zero-Covid policy has been a lodestone on the housing market too. Buyers are understandably reluctant to invest in a long-term asset in a market that faces the indefinite prospect of lockdowns and economic pain. Reopening should serve as a catalyst for housing sales in markets with fundamentally good supply-demand dynamics like upper-tier cities in the Yangtze River Delta and Pearl River Delta.
Duncan Wrigley is Chief China Economist at Pantheon Macroeconomics.