Lessons from China’s fizzled economic recovery

INSTEAD of being 2023’s banner economy, China was relegated to the ranks of the also-rans.

Rather than roaring back after the draconian zero-Covid curbs were erased, the country’s recovery quickly fizzled.

Prospects for a significant improvement next year are limited in the absence of sweeping efforts to crank up growth – something President Xi Jinping appears reluctant to embrace.

There are lessons for everyone in how this former juggernaut came down to earth.

While China’s sub-par rebound will constrain world growth, it doesn’t have to be a disaster. The languishing expansion requires a healthy rethink of the country’s role in global commerce – and what we expect of it.

As disappointing as the year has been, Beijing may have done the world a favour.

Problems have been building in China’s economy for years, even before the pandemic. But so great was its prior performance, so rapidly did it catapult other major economies, that a merely mediocre performance is a shock.

An annual increase in gross domestic product of about 5%, a goal likely to be met when fourth-quarter numbers are released in coming weeks, is something a lot of advanced economies would usually kill for.

Drill down a bit and the picture is far less flattering: retail sales are decent but falling short of expectations, the property sector is mired in difficulties, and consumer and factory-gate prices are declining. An important measure of foreign investment hit a four-year low in November.

The National Bureau of Statistics conceded that the recovery leaves a lot to be desired. Conditions weren’t supposed to be so dour.

After Xi abandoned his strict zero-Covid policy in the final months of 2022 that kept the country isolated, great things were predicted.

Bull market retreats

Asian stocks entered a bull market in early January, the yuan gained, and neighbours like Singapore and Thailand eagerly awaited an influx of tourists.

The regulatory front looked promising, too, while a painful crackdown on technology companies appeared to be ending.

By the middle of the year, the bulls were in retreat. Rather than looking for reasons to laud China’s comeback from a couple of rough years, people began looking for signs of weakness. Economists at Citigroup Inc talked of a “confidence trap.”

A spate of articles and symposiums questioned whether something had fundamentally changed in China.

The cottage industry that developed around predictions of when – not whether – its economy would supplant the United States as the world’s biggest went silent. It was open season on Beijing.

This really shouldn’t have been so earth-shaking. The breakneck rates of growth that seemed unstoppable in the first decade of this century were always going to give way to something still impressive, but a lot more modest.

Too little heed was paid to the hurdles that come with a maturing economy. Too many people had staked careers on the idea that China possessed some secret sauce, that its ascent was a rare event in history.

Details didn’t matter so much, nor did developments that chipped away at that achievement.

Bloated real-estate companies, a dwindling labour force and an increasingly punitive state were eroding the achievements of the prior four decades.

Did it take Covid to drive this home? In a recent Foreign Affairs essay, Adam Posen traced the roots of the malaise to around 2015, when the government began throwing its weight around in more arbitrary ways.

But the pandemic, and Xi’s extreme response, pushed those challenges to the fore.

‘Economic long Covid’

Posen, who is president of the Peterson Institute for International Economics in Washington, wrote that China suffered from a case of “economic long Covid.”

Its former mojo hasn’t returned despite the dismantling of crippling containment measures.

“The condition is systemic, and the only reliable cure – credibly assuring ordinary Chinese people and companies that there are limits on the government’s intrusion into economic life – cannot be delivered,” Posen wrote.

The virus itself didn’t do the most damage, he argued. The big shift was the public’s response to the harsh measures aimed at containing the disease. Rather than invest money, households and small businesses now prefer to hoard it.

China’s leaders wrapped up their annual economic work conference this month with little sign they were ready to dramatically juice growth.

The central bank has made small cuts to interest rates and budget spending is supportive, though not a game changer.

There is little appetite, at least publicly, to substantially change course in 2024. Perhaps the true recalibration has been outside China. The country is no longer seen as a commercial world beater, sweeping all before it.

Rather than a year that showcased pent-up demand and resilience while the United States slipped into recession, we have seen the limits of China’s big but slow-moving, economy. (That American slump, so widely predicted as the price of rapid monetary tightening, hasn’t materialised either.)

As jarring as the reset has been, the bigger shift may have been in our expectations and the way we recognise success or failure.

Let’s hear it for 2023, when views of China came down to earth. A cocktail of realism is not a bad thing to see in the new year. — Bloomberg

Daniel Moss is a Bloomberg Opinion columnist. The views expressed here are the writer’s own.