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 the country’s surging household savings rate. 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, household savings 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 cash savings 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.
All major economies went through some version of a lockdown early in the pandemic, but none experienced anything nearly as abrupt, severe, and unrelenting as China’s anti-pandemic measures. Zero COVID was as unsparing as it was arbitrary in its local application, which appeared to follow only the whims of party officials. The Chinese writer Murong Xuecun likened the experience to a mass imprisonment campaign. At times, shortages of groceries, prescription medicines, and critical medical care beset even wealthy and connected communities in Beijing and Shanghai. All the while, economic activity fell precipitously. At Foxconn, one of China’s most important manufacturers of tech exports, workers and executives alike publicly complained that their company might be cut out of global supply chains.
What remains today is widespread fear not seen since the days of Mao—fear of losing one’s property or livelihood, whether temporarily or forever, without warning and without appeal. This is the story told by some expatriates, and it is in keeping with the economic data. Zero COVID was a response to extraordinary circumstances, and many Chinese believe Xi’s assertion that it saved more lives than the West’s approach would have. Yet the memories of how relentlessly local officials implemented the strategy remain fresh and undiluted.
Some say the CCP’s decision to abandon zero COVID in late 2022 following a wave of public protest indicated at least some basic, if belated, regard for popular opinion. The about-face was a “victory” for the protesters, in the words of The New York Times. Yet the same could not be said for ordinary Chinese people, at least in their economic lives. A month before the sudden end of zero COVID, senior party officials told the domestic public to expect a gradual rollback of pandemic restrictions; what followed a few weeks later was an abrupt and total reversal. The sudden U-turn only reinforced the sense among Chinese people that their jobs, businesses, and everyday routines remain at the mercy of the party and its whims.
Of course, many other factors were at play in the immense, complex Chinese economy throughout this period. Business failures and delinquent loans resulted from a real estate bubble that burst in August 2021, and remain a persistent drag on growth and continue to limit local government funding. Fears of overregulation or worse among owners of technology companies also persist. U.S. trade and technology restrictions on China have done some damage, as have China’s retaliatory responses. Well before the onset of COVID, Xi had started to boost the role of state-owned enterprises and had increased party oversight of the economy. But the party had also pursued some pro-growth policies, including bailouts, investment in the high-tech sector, and easy credit availability. The COVID response, however, made clear that the CCP was the ultimate decision-maker about people’s ability to earn a living or access their assets—and that it would make decisions in a seemingly arbitrary way as the party leadership’s priorities shifted.
SAME OLD STORY
After defying temptation for decades, China’s political economy under Xi has finally succumbed to a familiar pattern among autocratic regimes. They tend to start out on a “no politics, no problem” compact that promises business as usual for those who keep their heads down. But by their second or, more commonly, third term in office, rulers increasingly disregard commercial concerns and pursue interventionist policies whenever it suits their short-term goals. They make examples of a few political rivals and large multinational businesses. Over time, the threat of state control in day-to-day commerce extends across wider and wider swaths of the population. Over varying periods, Hugo Chávez and Nicolás Maduro in Venezuela, Recep Tayyip Erdogan in Turkey, Viktor Orban in Hungary, and Vladimir Putin in Russia have all turned down this well-worn road.
When an entrenched autocratic regime violates the “no politics, no problem” deal, the economic ramifications are pervasive. Faced with uncertainty beyond their control, people try to self-insure. They hold on to their cash; they invest and spend less than they used to, especially on illiquid assets such as automobiles, small business equipment and facilities, and real estate. Their heightened risk aversion and greater precautionary savings act as a drag on growth, rather like what happens in the aftermath of a financial crisis.
Meanwhile, the government’s ability to steer the economy and protect it from macroeconomic shocks diminishes. Since people know that a given policy could be enforced arbitrarily, that it might be expanded one day and reversed the next, they become less responsive to stimulus plans and the like. This, too, is a familiar pattern. In Turkey, for instance, Erdogan has in recent years pressured the central bank into cutting interest rates, which he hoped would fuel an investment boom; what he fueled instead was soaring inflation. In Hungary, a large fiscal and monetary stimulus package failed to soften the pandemic’s economic impact, despite the success of similar measures in neighboring countries.
The same trend is already visible in China because Xi drove up the Chinese private sector’s immune response to government intervention. Stimulus packages introduced since the end of the zero-COVID policy, meant to boost consumer spending on cars and other durable goods, have not gained much traction. And in the first half of this year, the share of Chinese companies applying for bank loans remained about as weak as it was back in 2021—that is, at half their pre-COVID average—despite efforts by the central bank and finance ministry to encourage borrowing at low rates. Low appetite for illiquid investment and low responsiveness to supportive macroeconomic policies: that, in a nutshell, is economic long COVID.
Once an autocratic regime has lost the confidence of the average household and business, it is difficult to win back. A return to good economic performance alone is not enough, as it does not obviate the risk of future interruptions or expropriations. The autocrat’s Achilles’ heel is an inherent lack of credible self-restraint. To seriously commit to such restraint would be to admit to the potential for abuses of power. Such commitment problems are precisely why more democratic countries enact constitutions and why their legislatures exert oversight on budgets.
Deliberately or not, the CCP has gone farther in the opposite direction. In March, China’s parliament, the National People’s Congress, amended its legislative procedures to make it easier, not harder, to pass emergency legislation. Such legislation now requires the approval of only the Congress’s Standing Committee, which is made up of a minority of senior party loyalists. Many outside observers have overlooked the significance of this change. But its practical effects on economic policy will not go unnoticed among households and businesses, who will be left still more exposed to the party’s edicts.
The upshot is that economic long COVID is more than a momentary drag on growth. It will likely plague the Chinese economy for years. More optimistic forecasts have not yet factored in this lasting change. To the extent that Western forecasters and international organizations have cast doubt on China’s growth prospects for this year or the next, they have fixated on easily observable problems such as chief executives’ fears about the private high-tech sector and financial fragility in the real estate market. These sector-specific stories are important, but they matter far less to medium-term growth than the economic long COVID afflicting consumers and small businesses at large, even if that syndrome is less visible to foreign investors and observers. (It may be apparent to some Chinese analysts, but they cannot point it out in public). And although targeted policies may reverse problems limited to a particular sector, the broader syndrome will persist.