Economic long COVID and the Chinese economy

Foreign Affairs magazine had an article entitled the ‘End of China’s economic miracle’ is which Adam Posen argues that the Chinese economy is unlikely to rebound to its pre-pandemic strength. He refers to this as “economic long COVID” which stems from of the public’s loss in confidence in the Chinese government’s economic policies.

Prior to the pandemic an unspoken agreement existed between the Chinese government and its citizens in which the government refrained from interfering in economic issues as long as individuals steered of politics. This “no politics, no problem” approach facilitated China’s impressive economic growth for four decades. However with the government response to COVID being marked by random lockdowns started to unravel this trust with the Chinese population hesitant to invest or spend. This fear, rather than the pandemic itself, is the primary cause of China’s stagnation. Some notable data points are:

• Household savings rates have surged by 50% since 2015, a year that marked the beginning of the state’s increased control over the economy.

• Consumption of durable goods has declined by about 30% since early 2015, and private investment has plummeted by 66% over the same period.

This data shows how risk adverse the Chinese population became although this is not unique to China as it is a common occurrence in authoritarian regimes where rulers prioritise political control over economic stability. Initially, such regimes may experience growth by allowing politically aligned businesses to flourish. However, as these regimes consolidate their power, they tend to intervene more arbitrarily in the economy, ultimately undermining growth. This can also be seen in countries like Venezuela, Turkey, Hungary, and Russia. The Chinese government’s efforts to exercise greater control over the economy has meant an erosion of public trust and ultimately less economic growth. Also expansionary fiscal and monetary policy has had a limited impact on economic growth.

Economic long COVID in China presents an opportunity for the US to adopt a different policy towards – instead of sanctions and tariffs the focus could be on attracting Chinese capital, labour and businesses in general. Countries like Australia, Canada, and Singapore that have successfully attracted Chinese investment and talent.

Foreign Affairs – The End of China’s Economic Miracle. How Beijing’s Struggles Could Be an Opportunity for Washington By Adam S. Posen August 2, 2023.