China’s Reopening from Covid Likely Won’t Be Straightforward

China relaxed some of its Covid rules this week as the country inches closer to an exit from its zero-Covid policy. But don’t expect a full reopening of China’s economy anytime soon.

The fundamental challenge faced by policymakers is the rising economic costs of maintaining their zero-Covid policy while the vaccination rate for elderly citizens is still low, according to our chief China economist Hui Shan. “The path for the world’s most populous and second-largest economy to reopen after almost three years of zero-Covid policy will probably not be straightforward,” Shan wrote in a report. “The combination of rising cases, some regions loosening policies, the winter flu season, and the upcoming Lunar New Year when hundreds of millions of people typically travel makes it difficult to predict how cases, Covid restrictions, and mobility may evolve in the coming months.”

Earlier this week, Chinese officials loosened key restrictions -- home quarantining is now allowed, and health tracking codes are increasingly being scrapped. These developments follow news reports about individual Chinese cities also relaxing restrictions.

However, China is likely to have some way to go before it fully transitions out of zero-Covid policy and the country’s growth could remain weak over the next six months, according to Shan.

Shan and Goldman Sachs Research identified four reopening scenarios, with the third scenario being the most likely:

1.  An immediate, abrupt reopening in a somewhat disorderly manner. This might happen if Chinese officials felt that overall fatigue with controls was so severe that the ability to keep them in place was being undermined.
2.  China launches reopening immediately but manages the pace to cope with the capacity of the health care system — similar to the way other countries reopened.
3.  China reopens in April 2023 after steady preparations at the beginning of next year. This means zero-Covid policy would remain for the short term, so officials are able to prepare to better protect the most vulnerable in the population. This is the baseline GS Research forecast and is expected to be the most likely path forward. In this scenario, Shan forecasts that China’s real GDP growth will rise 1.5 percentage points to 4.5% in 2023, and then to 5.3% in 2024. 
4.  China continues to tighten Covid controls substantially in the months ahead, with significant restrictions for much of 2023.

China’s path out from its zero-Covid policy may still be uncertain, but it’s necessary that the country reopens, says Hui Shan. Our economists previously estimated that Covid-related restrictions have reduced Chinese GDP output by around 4-5% from its trend levels.

“For policymakers, an exit strategy is needed to ensure social and economic stability,” Shan wrote. “We believe these scenarios help build a framework in gauging the potential trade-offs and assessing the ultimate economic impact.”