In view of the economic situation, Beijing is challenged like it hasn’t been for a long time: There have been many positive announcements in the past few weeks – action must now follow.
Anyone who walked the streets of the Chinese capital in the last few days of the past year could feel a touch of normality again. The streets were much busier than during the first days of December when the corona virus was raging in Beijing; The first traffic jams formed occasionally on the ring motorways. People were also crowding into boutiques, department stores and restaurants again.
These are the first signs of an economic recovery in Beijing, where the massive wave of infections began after the Chinese government announced the end of the zero-Covid policy on December 7th. In the first few days after, many Beijingers isolated themselves in their own four walls for fear of infection or stayed at home because they were ill with Covid-19. At the end of December, according to unofficial surveys, an incredible 75 percent of Beijing’s citizens were ill or had already recovered. This seems to have peaked, at least in the capital.
But in other parts of the country, the wave is just beginning to build. In the second half of January at the latest, when hundreds of millions of Chinese travel to their hometowns to celebrate the Chinese New Year there, they will spread the virus across the country – and thus ensure that shops, cafés and restaurants are closed there stay empty.
The recovery still needs time
China is still a long way from a sustainable economic recovery. In the coming months, not only private consumption will suffer massively in large parts of the country. Rather, many industrial companies will also significantly reduce their activities or stop them altogether because the workforce falls ill with Covid-19. The interrupted supply chains will also be felt in Europe and the USA. Only when the peak of the wave of infections has passed will the situation really ease off.
That would also be necessary, because 2022 was a catastrophe from an economic point of view. Constant lockdowns, such as in the economic metropolis of Shanghai in April and May, have left deep scars. The experts at Nomura assume that China’s economy has grown by 2.8 percent at best. The Chinese government had targeted growth of “around 5.5 percent”.
Millions of Chinese have lost their jobs. Young people are particularly affected; youth unemployment is almost 20 percent. The constant lockdowns have also driven countless small and large companies into bankruptcy.
The pact with the people is under scrutiny
This means that Beijing is challenged like it hasn’t been for a long time. If the government does not succeed in effectively cushioning the consequences of the crisis for the individual, the pact, according to which the people renounce political participation in exchange for steadily increasing prosperity, could begin to crumble. People could rebel and question the Communist Party’s monopoly on power. It is the government and party leadership’s nightmare scenario.
At the end of November, tens of thousands of mostly young Chinese showed them just how explosive the situation is when they took to the streets their anger at the constant lockdowns, mass tests and forced quarantine.
The sudden departure from the zero-Covid policy that followed did not exactly increase the people’s trust in their rulers – paradoxically as it may seem. For almost three years, state propaganda had declared that the corona virus was a serious threat to life and limb from which only the Communist Party could protect people. Now she leaves people alone with the virus.
In Zhongnanhai, the Beijing power center of the government and the Communist Party, the alarm bells are ringing. In the past few weeks there have been numerous meetings at which those responsible wanted to set the course for an economic recovery in the current year.
New tones in economic policy
On December 20, Premier Li Keqiang chaired a State Council meeting and promised that the government would act swiftly to stabilize the economy and create new jobs. Construction projects, it was said after the meeting, should also be continued in the cold season. In addition, the government wants to create an environment in which private companies can do business successfully and, above all, companies in the platform economy can thrive, because there is great potential for creating additional jobs. In addition, the government will ensure better framework conditions for foreign companies.
There are new tones in economic policy that give cause for optimism. In his speech at the 20th Communist Party Congress in mid-October, head of state and party leader Xi Jinping emphasized the importance of state-owned companies, but above all the importance of Marxist ideology for China’s economic development. In 2021, Xi put tech companies in their place with numerous new laws. Now there seems to be a rethink.
The results of the Central Work Conference for the Economy (CEWC), which took place in mid-December, already made people sit up and take notice. At the annual meeting, the government sets the guidelines for economic policy for the following year. According to reports, Beijing is targeting economic growth of 5 percent for 2023.
strengthening the private sector
the Closing statement of the CEWC mentions the importance of the private sector for economic development in several places. That was different in the final declarations of the conferences in 2021 and 2020. Private companies, it is now said, should be treated the same as state-owned companies.
The pandemic, on the other hand, is hardly mentioned. The government only promises to ensure the supply of medicines and to provide adequate protection for the elderly population. There is no longer any talk of new controls and restrictions – a clear signal that Beijing, like the rest of the world, is heading towards the “Living with the Virus” strategy this year. Xi’s zero-Covid policy is history.
Another policy thought up by Xi was only marginally mentioned at the CEWC: the concept of so-called “general prosperity” hardly appears in the final declaration. With the strategy, Xi wanted to increase the wealth of low-income sections of the population, essentially through a redistribution from top to bottom: managerial salaries should be capped, high earners should pay higher taxes, and large private companies should donate parts of their profits.
Has Xi been forced to change course?
The question that remains unanswered is whether Xi initiated the apparent change of course himself or was forced to do so by more pragmatic factions at the party leadership, which could indicate a weakening of his position.
Elsewhere, Xi’s course is expected to continue this year. With a view to the struggling real estate sector, Xi’s motto still applies, according to which “apartments should be used for living and not for speculation”. Beijing appears determined to avoid past excesses, but wants to prop up the sector enough to allow real estate developers to finish construction of unfinished homes and hand them over to buyers. Basically the right course.
The end of the zero-Covid policy and the ailing economy offer the opportunity for a new beginning, in the context of which structural mistakes from the past can also be corrected. For example, Beijing would have to reorganize public finances. Many local governments are heavily in debt, while Beijing’s finances are relatively healthy. For example, the head office would have to leave a larger part of the tax revenue to the local administrations or increase the transfer payments.
In addition, Beijing should finally create framework conditions under which private consumption can account for a larger part of economic output and no longer primarily the public sector with partly unprofitable investments is responsible for growth. But something seems to be happening here too. A meeting of the Politburo on December 14 decided a 38-point plan for the years 2022 to 2035, with which the government wants to strengthen private consumption.
So there is no lack of announcements and the right plans in Beijing at the beginning of the new year, but concrete measures on how the plans should be implemented are still missing in some places. The annual session of the National People’s Congress in March will probably provide further information. After three turbulent years, China appears to be returning to a more pragmatic course of stable growth.