As 2022 came to an end, hopes were rising that China’s economy—and, consequently, the global economy—was poised for a surge. After three years of stringent restrictions on movement, mandatory mass testing, and interminable lockdowns, the Chinese government had suddenly decided to abandon its “zero COVID” policy, which had suppressed demand, hampered manufacturing, roiled supply lines, and produced the most significant slowdown that the country’s economy had seen since pro-market reforms began in the late 1970s. In the weeks following the policy change, global prices of oil, copper, and other commodities rose on expectations that Chinese demand would surge. In March, then Chinese Premier Li Keqiang announced a target for real GDP growth of around five percent, and many external analysts predicted it would go far higher.
Initially, some parts of China’s economy did indeed grow: pent-up demand for domestic tourism, hospitality, and retail services all made solid contributions to the recovery. Exports grew in the first few months of 2023, and it appeared that even the beleaguered residential real estate market had bottomed out. But by the end of the second quarter, the latest GDP data told a very different story: overall growth was weak and seemingly set on a downward trend. Wary foreign investors and cash-strapped local governments in China chose not to pick up on the initial momentum.
This reversal was more significant than a typical overly optimistic forecast missing the mark. The seriousness of the problem is indicated by the decline of both China’s durable goods consumption and private-sector investment rates to a fraction of their earlier levels, and by Chinese households’ increasing preference for putting more of their savings in bank accounts. Those trends reflect people’s long-term economic decisions in the aggregate, and they strongly suggest that in China, people and companies are increasingly fearful of losing access to their assets and are prioritizing short-term liquidity over investment. That these indicators have not returned to pre-COVID, normal levels—let alone boomed after reopening as they did in the United States and elsewhere—is a sign of deep problems.
What has become clear is that the first quarter of 2020, which saw the onset of COVID, was a point of no return for Chinese economic behavior, which began shifting in 2015, when the state extended its control: since then, bank deposits as a share of GDP have risen by an enormous 50 percent and are staying at that high level. Private-sector consumption of durable goods is down by around a third versus early 2015, continuing to decline since reopening rather than reflecting pent-up demand. Private investment is even weaker, down by a historic two-thirds since the first quarter of 2015, including a decrease of 25 percent since the pandemic started. And both these key forms of private-sector investment continue to trend still further downward.
Financial markets, and probably even the Chinese government itself, have overlooked the severity of these weaknesses, which will likely drag down growth for several years. Call it a case of “economic long COVID.” Like a patient suffering from that chronic condition, China’s body economic has not regained its vitality and remains sluggish even now that the acute phase—three years of exceedingly strict and costly zero-COVID lockdown measures—has ended. 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.
China’s development of economic long COVID should be recognized for what it is: the result of President Xi Jinping’s extreme response to the pandemic, which has spurred a dynamic that beset other authoritarian countries but that China previously avoided in the post–Mao Zedong era. Economic development in authoritarian regimes tends to follow a predictable pattern: a period of growth as the regime allows politically compliant businesses to thrive, fed by public largess. But once the regime has secured support, it begins to intervene in the economy in increasingly arbitrary ways. Eventually, in the face of uncertainty and fear, households and small businesses start to prefer holding cash to illiquid investment; as a result, growth persistently declines.
Since Deng Xiaoping began the “reform and opening” of China’s economy in the late 1970s, the leadership of the Chinese Communist Party deliberately resisted the impulse to interfere in the private sector for far longer than most authoritarian regimes have. But under Xi, and especially since the pandemic began, the CCP has reverted toward the authoritarian mean. In China’s case, the virus is not the main cause of the country’s economic long COVID: the chief culprit is the general public’s immune response to extreme intervention, which has produced a less dynamic economy. This downward cycle presents U.S. policymakers with an opportunity to reset the economic leg of Washington’s China strategy and to adopt a more effective and less self-harming approach than those pursued by the Trump administration and—so far—the Biden administration.
NO POLITICS, NO PROBLEMS, NO MORE
Before the pandemic, the vast majority of Chinese households and smaller private businesses relied on an implicit “no politics, no problem” bargain, in place since the early 1980s: the CCP ultimately controlled property rights, but as long as people stayed out of politics, the party would stay out of their economic life. This modus vivendi is found in many autocratic regimes that wish to keep their citizens satisfied and productive, and it worked beautifully for China over the past four decades.
When Xi took office in 2013, he embarked on an aggressive anticorruption campaign, which along the way, just happened to take out some of his main rivals, such as the former Politburo member Bo Xilai. The measures were popular with most citizens; after all, who would not approve of punishing corrupt officials? And they did not violate the economic compact, because they targeted only some of the party’s members, who in total make up less than seven percent of the population. A few years later, Xi went a step further by bringing the country’s tech giants to heel. In November 2020, party leaders made an example of Jack Ma, a tech tycoon who had publicly criticized state regulators, by forcibly delaying the initial public offering of one of his companies, the Ant Group, and driving him out of public life. Western investors reacted with concern, but this time, too, most Chinese were either pleased or indifferent. How the state treated the property of a few oligarchs was of little relevance to their everyday economic lives.
The government’s response to the pandemic was another matter entirely. It made visible and tangible the CCP’s arbitrary power over everyone’s commercial activities, including those of the smallest players. With a few hours’ warning, a neighborhood or entire city could be shut down indefinitely, retail businesses closed with no recourse, residents trapped in housing blocks, their lives and livelihoods put on hold.
Economic long COVID will likely plague the Chinese economy for years.
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