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From zero tolerance to “let it rip”. Not only has China changed its mind about how to deal with Covid, it has executed the mother of all twists and turns in response to slower growth and escalating civil unrest amid draconian lockdowns.

If Beijing expects immediate economic growth from abandoning its rigid controls, it is mistaken. There will be a growth dividend from the policy shift, but the world’s second-largest economy will be worse before it gets better, and that will be next spring, at least until the easing of restrictions begins to bear fruit.

Meanwhile, China could face a technical recession this winter as workers stay home for fear of contagion, leaving factories short-staffed. Almost every country that has moved away from lockdowns to a “we have to learn to live with Covid” approach has suffered an outgoing wave of rising infections, and China is following suit.

People change their behavior either because they have the virus or because they think they might be infected. Metro use in Beijing, where the rise in cases has been sharpest, is running at 20% of pre-pandemic levels.

Given China’s position as the world’s largest exporter of goods, the implications are obvious. Companies will face staff shortages. Output levels will fall and supply chain bottlenecks will increase, adding to inflationary pressures in developed countries such as the UK. Cost-of-living pressures will fall more slowly than otherwise.

As Hargreaves Lansdown analyst Suzanne Streeter says: “Mass hospitalizations are likely to trigger a new period of anxiety for consumers and businesses and constrain China’s economy, while the prospect of fresh supply chain growth could prolong price pains. is felt in the countries of the world.”

Mark Williams, chief Asia economist at consultancy Capital Economics, estimates China’s economy will shrink by 2.5% this year and 2% next year, a far cry from the double-digit annual growth rates of a decade ago.

“The reopening for the economy has been completely negative so far,” he says. “Activity has been suppressed for most of the past year as the fear of being forced into quarantine has kept people at home. The fear of quarantine has now given way to the fear of infection, and the economic result is even worse.”

If, as expected, infections peak in the next month or so, the experience of other countries is that it takes time for people to feel confident enough to resume life as normal. Activity will be fully restored only in early spring.

On balance, analysts believe the turnaround will lead to stronger Chinese growth and increased global trade. Schroders emerging markets economist David Rees says: “There is a lot of uncertainty about how much disruption the outgoing wave of infections will cause. But ultimately easing Covid restrictions will release the handbrake that has been holding back activity and allow for better delivery of existing policy support.”


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