As long as China sticks to its zero-Covid policy, no amount of regulatory tinkering can revive its economy
- Without a road map for a way out or addressing deep-seated social issues, short-term strategies for economic recovery will have only a limited effect
- Regulatory easing can only work alongside efforts to increase the supply of jobs and housing and raise Covid-19 immunity – even if it means using foreign vaccines
The economic challenges facing China today are distinctly complex. Job creation is critical to social stability, even as the country’s ageing workforce is shrinking. The private sector must prop up a less-efficient state-owned sector. Economic development must be balanced with political control.
Added to these issues are dampened global and domestic demand for consumer goods, energy shocks, rising commodity prices, and disrupted trade and surging inflation as a result of the war in Ukraine. The world is staring at a serious risk of recession.
Long-term regulatory stability remains uncertain. To toe the line, Big Tech will remain hamstrung from “imprudent” risk taking.
Liberalising the real estate sector is another short-term expediency; Beijing remains unwavering in its stance against property speculation as it pursues its goal of common prosperity. Yet, at the root of China’s real estate woes is the land-based financing carried out by local governments.
Local governments are driven by fiscal imbalances to rely on land-leasing revenues and land conveyance fees; they shoulder a disproportionally large chunk of fiscal responsibilities relative to their shares of tax income. Thus, there can be no lasting solution to China’s real estate problem without fundamental fiscal reforms.
Moreover, tied to local land financing is an over-reliance on the market for housing. No regulatory flip-flops can begin to address China’s chronic housing imbalances without a Singapore-style social housing programme. Just as the state’s intervention in the internet sector may be excessive, its role in providing housing for ordinary people may be inadequate.
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From technology to property, no amount of regulatory tinkering will overcome weak domestic demand or unemployment – as more than 10 million young graduates are entering the job market. Restoring the broader health of the economy – putting money in people’s pockets – is required.
As for the international economic environment, China is limited as to what it can do, other than attempting to accelerate an end to the war in Ukraine.
It can, however, determine its domestic Covid-19 policy, and work to balance public health with economic stability. Beijing is unlikely to deviate from its zero-Covid policy before the Party Congress in the autumn. There are good reasons it cannot abruptly adopt a Western-style “opening up”.
Given the relatively low vaccination rate among China’s elderly (those over 80) and the limited efficacy of China’s inactivated virus vaccines on Omicron, a premature relaxing of Covid-19 restrictions may prove devastating. Thus, any exit from zero-Covid is predicated on overcoming these two issues.
Yet, as zero-Covid is clearly unsustainable in the long term, an exit strategy is needed. Such a plan, even with phased and delayed implementation, will boost business confidence.
If there is one lesson to be learned from Hong Kong’s painful experience of Omicron, it is that achieving a high rate of vaccination among the elderly, preferably with the use of mRNA vaccines, is paramount.
The question is how best to make use of the time leading up to the Party Congress. Cadres are currently obsessed with controlling local Covid-19 outbreaks, sometimes leading to them to resort to excessive measures.
More effective would be to increase the vaccination rate among the elderly. Instead of short-term firefighting, officials should focus on building China’s long-term defences against Covid-19.
Compared to repeated mandatory testing for most the population with no end in sight, vaccinating a vulnerable minority group would be far less painful and costly.
Other than saving face, there is no rational basis for not using imported mRNA vaccines. Western medicine and medical technology is widely used in China – vaccines should be no different.
But for its reluctance to use tests offered by other countries at the start of the pandemic, the US might have been able to contain Covid-19 much better. Similarly, the human and economic costs of waiting for domestically developed mRNA vaccines are just too high.
Limited trials of imported mRNA vaccines could be rolled out in China’s most important economic regions such as the Greater Bay Area and Greater Shanghai. Crucially, this would pave the way for quarantine-free travel between Guangdong and Hong Kong.
While a nationwide roll-out could wait until domestically developed mRNA vaccines are ready, the government can garner useful feedback from the selective trials in preparation.
Enabling key economic regions to return to more normal business, free from fears of future lockdowns, is essential if China is to give itself a fair chance of achieving its growth target. In concert with the restoration of normal economic activity, removing excessive regulations can support growth.
But no amount of regulatory easing can revitalise economic growth if there is no clear exit path from perpetual zero-Covid restrictions.
Winston Mok, a private investor, was previously a private equity investor
