The ongoing zero-covid policy will lead China to an economic crisis

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China will face an economic crisis if it doesn’t end its zero-covid policy: ‘Beijing is racing against time’

Over the past several decades the economic portrait of China has evolved — in historically rapid fashion — from slow-growing poor nation to fast-rising global economic power. For several years, forecasters have debated not whether, but when the country will overtake the U.S. as the world’s largest economy.

But while China remains an economic juggernaut, it’s also facing a whole lot of economic trouble at the moment. There are warning signs on multiple fronts — from covid-related shutdowns to falling housing prices, from rising income inequality to a dearth of jobs for university graduates — and the government is almost certain to miss its target of 5.5 percent GDP for 2022. It may miss that mark badly. As one Bloomberg analysis put it this week, the “data for July suggest confidence is collapsing among China’s businesses and households.” 2022 will also be remembered as the year that China hit a dubious demographic milestone: Its population has begun to shrink. That’s not just a current problem — it could pose all kinds of long-term challenges for China if the decline cannot be slowed.

Hear more from this conversation between Lili Pike, Tom Nagorski, and Houze Song:

Beyond the recent data and the economic problems they reveal, there are potential political problems as well — given that China’s Communist Party Congress is to gather in the fall, presumably to anoint Xi Jinping as leader for a third term. All these problems will be on the table then. There have also been pockets of protest related to the economic woes. As an assessment by the Asia Society Policy Institute put it recently, “For a man obsessed with control, 2022 has not gone according to plan for Chinese President Xi Jinping.”

Grid has covered several of the underlying issues that have brought China to this difficult moment. In our latest “Global Grid” Twitter Spaces conversation, Global Editor Tom Nagorski spoke with Grid’s China reporter Lili Pike and Houze Song of the Paulson Institute, a leading expert on the Chinese economy.


Their conversation has been edited for length and clarity.

Tom Nagorski: Lili Pike, to just frame and set the table for us: What are the data showing us about the current slowdown in China?

Lili Pike: I’ll give a quick snapshot of what the latest numbers show. The GDP growth for this year is far lower than expected. And that’s tied into this ongoing zero-covid problem, where Chinese cities have been going into snap lockdowns. The latest numbers showed that in the second quarter, China’s GDP only grew by 0.4 percent. So that’s a far cry from the five-and-a-half percent target that the government set out at the beginning of the year.

And the latest numbers from July show that things are not turning around. Factory production, investment, consumer spending — all fell for the prior month.

And one striking statistic is that urban youth unemployment is also way up – in the latest data from July, that number rose to 20 percent. Twenty percent of young job seekers in the cities aren’t able to find a job.


All this reflects that people are just shaken up by these lockdowns. Most people are saving their money instead of spending it at shops and restaurants. And businesses are equally hesitant to invest in the future. And that’s all because these lockdowns are continuing. In late July Wuhan, the city that was locked down at the very beginning of covid, had another one million people stuck at home and then just last week, vacation hot spot Sanya on Hainan — a beautiful spot in southern China — also went to a snap lockdown. Tens of thousands of travelers weren’t able to return home. So you can imagine that would have a lot of people questioning whether they should take another trip in the future, and that leaves a lot of people hesitant to spend, and just worried about the shape of the economy.

TN: Has there been any evidence that in looking at the economic price that they’re paying, the Chinese have any appetite for loosening up on that policy, and easing up because of the economic pain?

LP: You would think after the Shanghai lockdown and after these most recent lockdowns that there would start to be some consideration of shifting toward a new strategy in China. But quite the opposite. The latest Politburo meeting from July showed that government officials were doubling down on the same strategy, committing to zero-covid for the foreseeable future. People have speculated that after the big [Communist] Party Congress in the fall, leaders might consider backing down and at least making the policy a little bit less stringent. But for now, zero-covid is still the core strategy for dealing with the pandemic in China.

TN: Houze Song, you’ve studied the Chinese economy for a long time. Perhaps you can just step back and put this in some perspective for us. How difficult is this relative to previous years — previous decades even — for the Chinese economy?

Houze Song: My opinion is that the current situation [in China] is probably the most challenging since the 2008 global financial crisis. This is because two of the biggest headwinds the Chinese economy currently faces — zero-covid and the property collapse — each individually would be a significant enough shock that it could trigger a recession for the Chinese economy. And right now, we have those two very disruptive shocks happening at the same time.


TN: You mentioned the 2008 financial crisis. Some of the numbers suggest it may even be worse than that, no?

HS: Of course, yes. In 2008 China, because of the massive stimulus, eventually managed to achieve something like 8 percent growth in the year 2009. But this time it’s not only the growth impact that is concerning, but also the financial implications. Right now we are seeing signs, for example, of Chinese households that cannot get their apartments delivered on time, and people are threatening to suspend mortgage payments, which means that there will be a risk to the banking sector. So right now, in my opinion, what makes the situation concerning has more to do with the potential financial implications rather than the magnitude of the slowdown.

TN: You mentioned mortgages. We have heard for years about real estate and housing issues in China. The real estate bubble. Talk if you would about the severity of the housing issue right now in China.

HS: The current housing crisis is partly policy-made, in the sense that going back to last year Beijing deliberately tried to engineer a soft landing of the property market. But I would say the more recent deterioration of the property sector probably has more to do with zero-covid.

Around this time last year we had Evergrande, which was a top-10 Chinese developer with a balance sheet of about 300 billion U.S. dollars, which basically defaulted on its debt. In the initial aftermath of Evergrande, things were pretty bad, but there was still a chance they might manage to achieve a soft landing for the property sector. But in the last few months, the situation has clearly taken a nose-dive. For the first time in many years, we have seen that except for a few major cities like Beijing and Shanghai, people are reluctant to purchase property. That’s something that has basically never happened on such a large scale previously.

TN: Lili, we are used to — rightly or wrongly — assuming that the Chinese Communist Party is going to guarantee jobs or work for its people, and will tend to do a good job when it comes to a level economic playing field. That may be a naive assumption. You mentioned that youth unemployment is on the rise. But you’ve also done a report for Grid about income inequality, in which you found that it’s as bad or worse than in this country.

LP: That’s right. I’d heard that income inequality in China has been high for decades, but that some measures show it’s actually higher than the U.S. was a surprise to me. Since the reforms and opening back in 1978, the economy was growing rapidly, so everybody was getting richer. And because everything in the economy was expanding — people were getting jobs, new growth was rapid — what experts told me is that people then were actually OK with a level of inequality, or at least they weren’t deeply upset about it. They weren’t protesting. But in recent years, as the economy has slowed down, and particularly during the pandemic, we’ve seen the fortunes of the poorest people in China just really get worse and worse. And this inequality problem is actually being felt in a much sharper way.

I found the data shows that since the beginning of the pandemic, there’s been an increase in inequality after a period of stable but high inequality in the 2010s. During the pandemic, the rich have continued to get richer, and billionaire wealth has doubled, which is quite striking. And meanwhile, poor people, particularly migrants in China, have really had a hard time getting by. Because of these lockdowns, migrants who move from rural areas to cities haven’t been able to find work as easily. They get paid job to job, they don’t have any stable income.

One story I looked at was the case of a migrant who was found living in a train station in Shanghai. Her case was kind of emblematic, because she came to Shanghai, right before the lockdown there, to find a job. Then the lockdown happened very suddenly. She was forced to live in a shelter because she couldn’t make any money, in the shelter she got covid, and then once she came out of covid, she was hoping she could find work after the lockdown. But because she’d had covid, employers actually discriminated against her there. There are these provisions and job listings that say anybody who’s had covid need not apply.

I think her case really tells you that the poorest people in China have suffered the most because of this policy. Shanghai has recovered somewhat, and these cities come in and out of lockdowns, but overall it’s been a real hit to the poorest people.


Xi Jinping came out with this big speech on “common prosperity” in August of last year, and that slogan was meant to be a vision for a more equal China, one that didn’t have such a large disparity in wealth and income, one where there weren’t certain sectors like the tech industry that were profiting so much. But what’s happened in the last six months, especially with these lockdowns, is really driving the country in the opposite direction, toward greater inequality.

TN: Lili used the word “protest,” and of course protest and social unrest, as we all know, are unusual in China. But there have been reports of protests due to the various issues you’ve both raised, be it the mortgage issue, the zero-covid policy, or others. Are these very rare and scattered still? Or are they gaining steam?

LP: My impression really is that protests remain fairly rare. I’ve seen some pop up around the lockdown. In Shanghai a few months ago, there were videos that were going viral of people in tall apartment buildings, banging pots and pans, saying that they wanted the lockdown to end, they wanted to be free of the lockdown.

So that’s a form of protest. Then, rather smaller-scale protests in Shanghai — one group of residents was protesting the conversion of their apartment units into housing for people who had covid. There was going to be a whole wing dedicated as kind of an isolation ward, and they were protesting that. And another case in northern China where people living in a kind of commuter city outside Beijing were upset because they weren’t able to drive into their jobs in the city, or take transit into the city to do their jobs. And we’ve seen a number of isolated incidents on campuses, with students being stuck in their dorm rooms and voicing opposition to that.

But my impression is these remain scattered incidents. And of course when people do try to protest online, through social media, those posts are often censored.


HS: My sense is that currently, yes, we are seeing an increasing number of protests, but that those protests so far are relatively easy to deal with. For example, the mortgage protests are really those households desperate to just get their apartment — so their demand is pretty simple, they only want the government to help them. And similarly, we have also heard news about some households that deposited money in small rural banks, they’ve organized protests because the rural banks went bankrupt, and their demand is just to give back their money. Right now it seems that local governments are still able to satisfy those protesters.

TN: Let’s get to solutions — either solutions that the Chinese government has put forward, or, Houze, given your expertise, solutions you think they should be putting forward. What are the key things the Chinese government is thinking of doing — or that you think they should be doing to address some of these problems?

HS: The number-one challenge is really zero-covid. My opinion is that as long as the zero-covid [policy] is in place, no other policy matters, regardless of how well it is designed or implemented. They will not be able to offset the impact of zero-covid. So right now, to jump-start the Chinese economy, you have to have some relaxation of the zero-covid policy. But I don’t think we’ll see this any time soon.

TN: This is a real Catch-22, if you will, a real puzzle I would think. Because many people have said what you just said — that the way out of a lot of these problems is, Don’t be so rigid, you can’t lock down a city every time. But the Chinese government has staked out this ground so aggressively. And they thought — for good reason — that they had been successful at the beginning. At what point does the economic reality here compel some relaxation?

HS: I think Beijing is also concerned about the economic cost of the zero-covid [policy]. And yes, I really don’t think that China’s economy can continue in its current shape for another year or so. I think that another year or two of zero-covid will be sufficient to trigger a significant economic crisis. So really, I think Beijing is racing against time. I think they probably need to figure out some solution within basically the next six months, and currently it doesn’t seem to me they have a well-designed plan to achieve this.


So there’s still high uncertainty but time is really not on their side.

TN: That takes us directly to the political question. We are just a few months away from the Party Congress at which it is widely assumed that Xi Jinping will get a third five-year term as the country’s leader. What, if any, are the political consequences of this?

HS: There have been a lot of reports about near-term consequences, and how it will affect the upcoming Party Congress. Those stories seem plausible. But as we all know, it’s really hard to verify how credible these stories are until the conclusion of the Party Congress.

TN: To be clear, nobody is suggesting that Xi Jinping will not win another term. So what does it actually mean? Just that there may be some behind-the-scenes debate over the policies? What might the political difficulties that arise from this look like?

HS: I think so far, the Chinese leadership has collectively endorsed zero-covid, at least publicly. That’s the only thing that we can say for sure. But I would say for the future Chinese leadership, those who take power after the Party Congress, this is really a dilemma they have to face. On the one hand, they have to end zero-covid; but on the other hand, there will definitely be a lot of criticism. Even if we all know that it’s the right policy, in the immediate months after they end the zero-covid policy, given the scale of China’s population, there will be a large increase in infections and deaths. And that will probably have even larger political ramifications than what we have seen now.


So my sense is that the bigger political challenges will really come later.

TN: I hate to pile on here with yet more problems, but recent data show that the population in China has begun to shrink, which is a startling thing when you think of all the years of the one-child policy and how hard China struggled to rein in its population. Now it’s going in another direction. Lili, talk a bit about this as a longer-term issue for the Chinese.

LP: It’s a really striking moment. China had the one-child policy for decades, and then in recent years, the government switched to encouraging people to have more kids — first the policy switched to two children and then three children more recently. And that was a reflection of a growing concern that the population was actually going to be hitting this peak that we now see, and concerns about what that means economically.

This U.N. data that we reported on a few months ago, shows that the peak is 2022, and going forward, China’s population is projected to decline very quickly — by the end of the century it could fall by 50 percent, which is just hard to wrap your head around in terms of what that will mean for the country. Already there have been some big changes. As people are having fewer and fewer children, the population structure has gotten older and older. It was actually back in 2012 that the workforce started to shrink in China.

So that labor force is a part of economic growth — and as it continues to shrink, that’s a problem for leaders as they think about how to keep the economy growing, even at a slower rate. And at the same time, you know, experts I’ve spoken with have pointed to this huge burden for the government to take on in taking care of all these old people. There won’t be as many young people to look after grandfathers and grandmothers, and that means that the government will have to pay out more in healthcare, pensions, and social welfare more generally.

So that’s, that’s really the challenge that looms.

TN: We’ve been unrelentingly negative here, but that’s the nature of the subject. Houze, is there any hope on the horizon on these fronts for the Chinese?

HS: I would say yes, there’s definitely hope, especially if they can manage somehow to transition to a living-with-covid model by say, next spring. My sense is if they wait longer than that, there’s a real risk that the situation can get out of control.

Thanks to Dave Tepps for copy editing this article.

  • Tom Nagorski
    Tom Nagorski

    Global Editor

    Tom Nagorski is the global editor at Grid, where he oversees our coverage of global security, U.S.-China relations, migration trends, global economics and U.S. foreign policy.

  • Lili Pike
    Lili Pike

    China Reporter

    Lili Pike is a China reporter at Grid focused on climate change, technology and U.S.-China relations.