BL Explainer: Impact of China’s exit from zero-Covid policy on global and Indian economy

Medical workers attend to patients of the coronavirus disease (Covid-19) at an intensive care unit (ICU) converted from a conference room, at a hospital in Cangzhou, Hebei province, China January 11, 2023. | Photo Credit: CHINA DAILY

What is the extent to which the Chinese government has lifted Covid related restrictions?

China, rather abruptly, ended its zero-Covid policy on December 7, 2022. The decision is seen to be largely triggered by nationwide protests by the Chinese people whose movements were severely restricted and the serious damage the intense lockdown had inflicted on the economy.

China has now dumped key aspects of its zero-tolerance policy, which required mass testing and snap lockdowns. Digital health passes are no longer required to enter public places and infected people are now allowed to quarantine at home.

The world’s second largest economy has also reopened its borders that were largely shut for nearly three years.

Will this provide a booster to a sagging Chinese economy?

Economists are optimistic that the lifting of Covid restrictions will help reboot the Chinese economy. Goldman Sachs and Morgan Stanley expect the economy to bounce back strongly and log over 5 per cent growth in 2023, from around 3 per cent in 2022. The recovery is expected to be driven by strong domestic consumption.

The focus at last month’s Central Economic Work Conference, where the country’s economic outlook, policy agendas and government priorities are discussed at the highest level, was on reviving economic growth through support to the private sector, a more accommodating stance towards real estate and big tech, and re-establishing consumer confidence.

According to Guo Shuqing, party secretary of the People’s Bank of China, Beijing has already started providing more financial support to households and private companies to help them recover from the impact of its zero-Covid policy.

The dismantling of Covid restrictions is already having a positive effect. The Chinese have started travelling in large numbers, and the transport ministry expects around 2.1 billion trips over the 40-day Spring Festival that kicked off on January 7; this will be nearly twice last year’s figure.

With Covid not yet under control in China, can this lead to an increase in cases and fatalities in the country?

To date, 90 per cent of China’s population has reportedly been vaccinated. According to Chinese media, many parts of the country are already past their Covid peak, and even if infection spreads, it isn’t likely to be severe or fatal. China has been reporting only a few deaths per day since the policy U-turn. The World Health Organisation, though, is not convinced about the figures.

The West, meanwhile, is apprehensive. With travel restrictions removed and Covid protocols considerably eased, they expect Covid cases to surge by the millions and overwhelm the healthcare machinery.  

Why do economists say that this reopening will disrupt global economy?

The ending of China’s self-imposed isolation is likely to have both positive and negative spin-offs for the world economy. As China is a big part of the global economy, its recovery will boost growth in many parts of the world. The Economist has gone on to say that ‘China’s reopening will be the biggest economic event of 2023’.

With Chinese consumers expected to ramp up discretionary spending, countries like the US and Europe that export branded and luxury goods, will stand to gain. Also, countries that export commodities that China consumes and tourist destinations that the Chinese frequent will benefit.

The end of restrictions should also help to resolve blockages in supply chains.

On the flip side though, inflation could be a costly side-effect of China’s re-entry into the mainstream. Competition for raw materials, oil and natural gas would increase, jacking up prices of these commodities and, thereby, causing inflationary pressures. China buys a fifth of the world’s oil and is a big consumer of copper, zinc, nickel, and iron ore.

In what way does this impact India?

Clearly, China will be keen to spur domestic growth and take back its place in the global supply chain.

For India, this could mean a spike in competition in traditional items of export such as engineering goods, marine products, metals, cotton, tea, non-basmati rice, etc., in the months ahead.

There is a fear that foreign investments into India could get diluted with China’s re-entry. But analysts aver that’s unlikely as developed nations are concerned about their over-reliance on China and are looking at alternative supply chain sources like India.

Also, foreign firms in China are concerned that the sudden scrapping of restrictions without due preparation could result in a resurgence of Covid cases and disrupt their operations. The number of companies moving business outside China is growing, and some have moved to India as well.

Energy and commodity prices in India, like in the rest of the world, could rise if China’s economy rebounds.

COMMENT NOW