China’s easing of its zero Covid policy may reverse the slowdown in the country’s growth rate, but could it come with some unintended consequences?
- The Chinese government has made important changes to the country’s zero Covid policy.
- It shows the government is concerned about economic growth.
- It also shows that policymakers are willing to listen to its people.
China has announced a significant relaxation in its zero Covid policy. The move has been welcomed by financial markets, which have sent Chinese stocks higher. However, investors may need to be careful what they wish for – there may be a sting in the tail.
In apparent response to widespread public unrest, the Chinese government has made changes to the country’s zero Covid policy. Asymptomatic or mild Covid cases can now isolate at home, rather than in specialist quarantine facilities. Equally, people no longer have to show proof of a negative test before entering public places.
At the same time, the country has stepped up its vaccine strategy, aiming to encourage many of its elderly rural citizens to get the jab. This has been a major barrier to the relaxation of the rules, with only around 40% of China’s over-80s having had the full two jabs and a booster. This is around half the rate for people in the UK.
Investors have been encouraged by the news. It shows that the Chinese government is worried about the impact on the economy: growth has slumped in 2022 and is set to come in at around 3% for the full year, significantly below initial expectations. The rumours are that the government will set a growth target of 5% this year. To achieve it, there will need to be supportive policies in place. The recent cut to the reserve requirement ratio from the People’s Bank of China has also set the stage for stronger economic growth in 2023.
It also shows, tentatively, that the Chinese government is willing to listen to its people. There had been concerns that the consolidation of power under President Xi Jinping would see a return to more traditional autocratic practices. This is still possible, but it suggests that – for the time being – he is aware that he rules by consent.
The worry for investors is what happens if China does revive. It has been held out as the great hope for the global economy, an escape from a recessionary spiral. Yet there is a danger than it could make things worse. A reviving China will have more demand for energy and raw materials. With prices already high, it could make inflationary pressures worse. The West might find itself having to raise interest rates to curb rising prices created by China.
Policymakers, including those in China, will be alert to the problem. And ultimately, China will not want to create an inflationary problem for itself, thereby weakening its ability to maintain relative easy monetary policy and introduce fiscal stimulus measures where necessary. Let’s hope it exercises caution.
