Chetan Ahya: When Will China’s Economy Reopen?

While China’s policy objectives strive for common prosperity, the country’s strict COVID management poses risks to employment and income, so when might Chinese policymakers start to reopen and recover?

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Welcome to Thoughts on the Market. I'm Chetan Ahya, Chief Asia Economist at Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, today I'll be focusing on the expected reopening of China's economy. It's Friday, October 7th, at 8:30 a.m. in Hong Kong.

When my colleagues and I discuss Asia's growth outlook with investors, one of the top questions we get is, when will China reopen and what the roadmap will look like. We believe a reopening will happen not because the rest of the world is now living with COVID, but because the effects of China's strict COVID management are now increasingly at odds with its policy objective of achieving common prosperity.

The challenges of a sharp rise in youth unemployment and significantly lower income growth, especially for the low income segments of the population, have become more pronounced this year ever since the onset of Omicron. To put this in context, the youth unemployment rate is at 19% and our wage growth proxy has decelerated from around 9% pre-COVID, to just about 2.2% year on year.

These issues are further exacerbated by the intensifying spillover effects from weaker exports and a continued drag from property sector. Over the next five quarters, growth in developed markets will likely remain below 2% year on year. The continued shift in DM consumer spending towards services will mean global goods demand will deflate further. And as exports weaken, manufacturing CapEx will also follow suit, which will further weigh on employment creation. As for the property market, the pace of resolution of funding issues and uncompleted projects are still relatively sluggish. With the outlook for the drivers of GDP growth weakening, we think the only meaningful policy lever is a shift in COVID management aimed at reopening, reviving consumption and allowing services sector activity to lift aggregate demand towards a sustainable recovery.

As things stand, several steps are necessary for a smooth reopening. They are, number one, renewed campaign to lift booster vaccination rates, especially amongst the elderly population. Number two, shaping the public perception on COVID. And number three, ensuring adequate medical facilities, equipment and treatment methods in the next 3 to 6 months. We therefore anticipate that policymakers will, in the spring of 2023, with the peak COVID and flu season behind us, be able to proceed with a broader reopening plan. Of course, we think that reopening in China will be gradual, as policymakers will remain mindful of the potential burden on the health care system.

Against this backdrop, we see the recovery strengthening from second quarter of 2023 onwards. In the next two quarters, we estimate GDP growth will be subpar at around 3%. But as China reopens from the spring of 2023, we expect GDP growth will strengthen to 5.5% in the second half of the year.

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