On Wednesday, residents in Shanghai shot fireworks, popped Champagne bottles, and smashed social-distancing barricades, relishing their first taste of freedom as the government lifted a two-month COVID lockdown that had confined the city’s 25 million people in their apartments and residential complexes. Shanghai officials declared victory over the virus, while state media outlets vowed that the city’s economy—which is roughly the size of Argentina’s—would “strongly and quickly” regain its pre-lockdown dynamism.
China’s State Council, the central government’s top policymaking body, has vowed to speed recovery in Shanghai and the broader national economy with a 33-point plan that has been widely touted in China’s state media since its release last week. The stimulus package promises $21 billion in tax rebates for companies; loan deferments and tax cuts on new car purchases for consumers; a $120 billion credit line for infrastructure projects; and a host of new measures to stabilize the nation’s supply chains.
But Beijing’s stimulus plan has left most global analysts underwhelmed. Skeptics dismiss the package as a hodgepodge of micro-measures that, though likely to prove marginally beneficial to a handful of selected industries, falls far short of what is needed to revive spending by consumers and enable China to achieve the government’s official economic growth target of 5.5% for 2022. The plan’s biggest weakness, many warn, is that it includes no adjustment to China’s “COVID-zero” approach to containing the virus—meaning that whatever limited relief the 33 support measures do provide are at risk of being immediately wiped out should COVID cases spike again and Beijing impose more lockdowns.
“They are coming full force with a stimulus package, but at the same time they are still adopting COVID-zero policies that are working in the exact opposite direction,” says Scott Kennedy, senior adviser and trustee chair in Chinese business and economics at the Center for Strategic and International Studies. “They’re acting in a very confused manner.”
Moreover, the plan offers no remedies to fundamental weaknesses in China’s economy, including an overindebted property sector; a stock market that has been battered by state-led crackdowns on once-dynamic internet companies; and a looming contraction in the size of China’s labor force. Some economists now warn that China’s current stagnation has imperiled its GDP growth for years to come and may thwart China’s goal of finally surpassing the U.S. as the world’s top economy.
“Whenever you have a 33-point plan, it means you don’t have a plan,” says Derek Scissors, a senior fellow at the American Enterprise Institute. “They are just throwing a bunch of stuff against the wall and hoping something works.”
In January, Eurasia Group, a political risk consultancy, made headlines by predicting China’s COVID-zero policy would backfire this year. The firm deemed China’s refusal to abandon that approach the No. 1 global risk of 2022. In its annual risk report, the group warned: “China’s ‘Zero COVID’ policy will fail to contain infections in 2022, and will lead to larger outbreaks and more severe lockdowns, and greater economic disruptions in a nation that has long been the world’s primary engine for growth.”
Eurasia’s doomsayers now say they weren’t gloomy enough. “The extent of the [global economic] disruption coming from Shanghai was a surprise, even to us,” says Michael Hirson, Eurasia’s practice head of China and Northeast Asia.
The economic standstill in Shanghai forced closures at semiconductor plants and production sites like Tesla’s Shanghai gigafactory, creating shipping delays and fueling inflation around the world. A COVID outbreak in Beijing prompted similar closures—shuttering businesses, halting public transportation, and barring residents from leaving their homes—although authorities forbade state media from describing restrictions in the capital city as a “lockdown.”
Michael Song, a professor at Chinese University of Hong Kong, estimated in March that China’s COVID lockdowns were likely costing the country at least $46 billion a month—the equivalent of 3.1% of the nation’s total monthly economic output. Song based his calculation on the assumption that cities generating about 20% of China’s GDP were, at the time, imposing some form of targeted lockdown.
In April, as the lockdowns dragged on, the International Monetary Fund slashed its China growth forecast for 2022 to 4.4%, down from 4.8%. Global investment banks including Goldman Sachs, J.P. Morgan, Citi, UBS, Morgan Stanley, and Nomura followed suit; none of those firms now believes China’s economy will expand by more than 4.3% this year. In late May, Bloomberg Economics downgraded its 2022 growth forecast for China to 2%—slower than the 2.8% growth Bloomberg expects from the U.S.
Victor Shih, a professor of Chinese politics at the University of California San Diego, says ugly April economic data—retail sales slumped 11% below the same month last year while industrial output declined 3%—were likely a wake-up call for China’s leadership, plainly demonstrating that Shanghai and Beijing needed to reopen and that the flailing economy demanded government intervention.
“It takes a very senior person to bring terrible data to the attention of [Chinese President] Xi Jinping,” says Shih. “Apparently, someone did because we are seeing more active policies to try to open up the economy.”
In an unusual emergency meeting with 100,000 government officials, Chinese Premier Li Keqiang last week called China’s economic situation “grim” and said officials at all levels should prioritize growth. “There is no time to lose,” he noted. China’s government released the 33-point stimulus plan after the meeting.
“[Li’s speech] was a call to action, for everybody to get on board with a plan to return to growth,” says Reva Goujon, a senior manager at research firm Rhodium Group.
And yet, given the urgency of Li’s warnings, the State Council’s policy response is curiously modest. The plan bestows a smattering of tax breaks upon companies and allows firms in five COVID-stricken industries to defer social insurance payments and loans. It provides emergency loans for the aviation industry, and proposes government bonds to support railway construction.
The total of tax relief and new policy loans in the package amount to less than $120 billion, less than 1% of China’s GDP. That’s a far cry from the $586 billion stimulus plan China announced in 2008 to bolster its economy in the midst of the Global Financial Crisis, which was then the equivalent of 7% of the nation’s economic output.
The current rescue plan’s benefits to consumers are limited to a $9 billion reduction in taxes on passenger car purchases, and the deferment of some consumer and mortgage loans. Li has rejected suggestions that Beijing emulate the U.S. in issuing stimulus payments directly to citizens—even as Chinese consumer sentiment has plunged to a record low.
Michael Pettis, a professor of finance at Beijing University’s Guanghua School of Management, argues the plan will do little to boost consumer spending. COVID outbreaks, and the subsequent lockdowns, he notes, have inflicted a heavy toll on small firms, forcing the closure of tens of thousands of small businesses in Shanghai and other cities. Those businesses’ “workers have been fired or have had their salaries and wages cut sharply,” Pettis observes. “This component of consumption…cannot recover until all the workers are rehired and their salaries and wages restored. This is not going to happen anytime soon.”
And even after jobs and wages come back, Pettis warns, Chinese consumers are apt to save more and spend less than they did before the lockdowns: “There is a sense of malaise within the country and a rising pessimism about economic prospects, and this has almost certainly caused households to cut back on discretionary spending in order to prepare better for a more uncertain future.”
In China’s state media, Western analysts’ mounting concerns about China’s economic slowdown, to the extent they are acknowledged at all, often are denounced as a ploy to destabilize the world’s second-largest economy and hinder its inevitable rise. “These pessimistic opinions are based on either groundless accusations or exaggeration to deliberately create an anxious and fearful sentiment for global capital and exacerbate the fluctuation of China’s economy and finance,” wrote Wang Wen, executive dean of Renmin University, in a recent commentary in the state-controlled Global Times. “China’s economy remains resilient, and its position as the engine of the global economy is unshakable.”
China’s 33-point plan may lack the heft of China’s 2008 stimulus package, but the focus of China’s COVID recovery strategy is similar to the one that pulled China through the 2008 financial crisis.
Beijing’s current plan ordered state-owned banks to issue $120 billion worth of credit to fund new infrastructure projects. China’s 2008 stimulus package similarly prioritized infrastructure spending, property development, and other state-owned sectors of the economy. That plan sparked economic growth of 9.4% and 10.6% in 2009 and 2010, respectively, even as other major economies contracted as a result of the financial crisis. But the growth came at a cost. China’s state-owned banks took on mountains of debt after the government leaned on them to issue loans to property developers like Evergrande Group, which treated new developments as speculative assets rather than homes to be lived in.
Now the government is asking state-owned banks to prop up speculative sectors of the economy that, until only recently, Beijing had been trying to rein in. In the case of Evergrande, for example, China’s leaders last summer decreed the massive debt accumulated by the giant developer and its peers to be unsustainable. The central government’s senior finance officials ordered the bloated property giants to reduce debt loads. Now the state is pouring money back into the property sector, threatening to reinflate a speculative real estate bubble without facilitating the real growth China needs.
“You can offer all kinds of stimulus to property developers, but if a lot of those funds are going towards debt servicing, that’s not going to have the desired effect driving new construction activity,” says Goujon. “China’s tried and true stimulus tools tend to focus on infrastructure and credit stimulus,” says Hirson. “But they are just not as effective today as they’ve been in previous crises.”
Goujon argues that the recovery of China’s economy, if it is to be sustainable, must be driven by private companies and particularly those in the nation’s tech sector. Since late 2020, China has deployed a range of policy measures and antitrust legislation to limit the power of tech giants like Alibaba Group Holding and Tencent Holdings, wiping out $1.5 trillion in value from China’s most innovative companies. “You can’t foster real innovation if your tech engineers, for example, are constantly having to worry about a new rule that that blindsides them,” Goujon says. China’s leadership has recently signaled that the worst of the government’s tech crackdown may be over. In mid-May, Vice Premier Liu He told Chinese tech giants that the government supports the development of the sector, but neither analysts nor investors appear fully convinced that China intends to loosen its grip over Big Tech.
Many Western analysts contend that the effect of whatever other economic rescue measures Beijing adopts will be muted until the government maps out a strategy for returning to a world in which China can reopen its borders; residents of China’s largest cities are no longer required to submit to a PCR test every few days; and businesses and consumers need no longer function in fear of sudden lockdowns. “I think the only signal that they can really use to reassure their trading partners, and, frankly, China’s private sector and consumers, [is to show] that they have a path to getting beyond COVID-zero,” says Kennedy. “Otherwise, people are just going to think they are just blowing smoke.”
China’s government is under pressure to move quickly, given the even larger economic challenges that loom on the horizon.
China is facing is a demographic time bomb—declining birth rates mean there will be fewer people to replace a workforce that is rapidly aging into retirement. Scissors argues the trend is the primary reason China’s economy is headed for a structural slowdown. He estimates that China’s economy can only count on five to 10 more years of sustained growth before its workforce will no longer be able to support a large and growing elderly population.
“We shouldn’t assume that China will meet its goal of overtaking the U.S. economy, certainly not within this decade,” says Goujon. “If China passes the U.S., it will either be because we shot ourselves in the foot,” Scissors says, referring to the U.S., “or it’ll be very brief.”
Additional reporting by Nicholas Gordon