China has U-turned on almost all major policies it put in place in the last 3 years — and it's not surprising, given the state of its economy
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- For the past few years, China has focused on zero-COVID, and reining in the tech and real-estate sectors to promote "common prosperity."
- But the country reversed some major policies in response to the abysmal GDP growth.
- China's GDP grew by 3% in 2022 — the worst since the chaotic Cultural Revolution ended.
In recent months, China has pulled major U-turns on a series of political and economic policies.
Most recently, after three years of pandemic lockdowns and isolation, China abruptly reversed course and abolished its zero-COVID policy — leaving the world guessing why.
And one major economic indicator — its GDP — was throwing up alarming signals.
China's GDP grew only 3.0% in 2022 — the worst in nearly half a century since the chaotic Cultural Revolution ended. Even though the growth was better than the 2.8% that economists polled by Reuters had expected, it was still far lower than the average growth rate of around 7.7% that the country posted in the decade before the pandemic, according to World Bank data.
While nobody could point to specific reasons for China's sudden reopening, analysts say economic stress and popular discontent with zero-Covid measures, contributed to the country's shift from on-off lockdowns.
"Caving to economic disruptions, widespread protests and worsening geopolitical tensions, Beijing has kicked off a comprehensive policy reset by completely scrapping its unpopular zero-Covid policy, easing tensions with the West and wooing private sector entrepreneurs and multinational corporations," Nomura economists wrote in a February 1 note.
China's GDP growth is vital because it is the world's second-largest economy after the US, so it's a driving force for global investment and trade. China is also home to one of the world's largest populations, so there is a considerable demand pull from the country.
China's recent shift in tone has been palpable. It's no wonder then that on January 30, the International Monetary Fund upgraded global growth to 2.9% from its forecast of 2.7% for 2023 — in part due to China's reopening.
Experts break down the stunning reversal of a few major policies and what this means for China and the global economy.
1. 'From zero-COVID to zero COVID policies in 30 days'
The most dramatic policy reversal China has put in place is the U-turn of its zero-COVID policy that was firmly in place for all three years of the pandemic.
Rory Green, the head of China and Asia research at TS Lombard, wrote in a January 11 note seen by Insider that China went "from zero-COVID to zero COVID policies in 30 days."
The about-turn came after on-off lockdowns in China slowed economic activity, causing GDP to grow just 0.4% in the second quarter of 2022, compared to the previous year. Even Apple — the world's most valuable company — had to deal with delays in iPhone shipments ahead of the holiday season last year, as COVID restrictions hit their massive manufacturing facility in Zhengzhou, China.
While Xi Jinping's administration was doubling down on zero COVID on November 10, it started rolling back restrictions less than a month later on December 7. On January 8, it significantly loosened border controls by scrapping quarantines for incoming travelers.
Three weeks later on January 28, Chinese Premier Li Keqiang pledged to make consumption the "main driving force" of the Chinese economy.
Earlier in January, Chinese vice premier Liu He — who is in charge of financial and economic affairs — said as much at the World Economic Forum in Davos that the opening up of China is a "basic state policy" and a key driver of economic progress.
"China's door to the outside will only open wider," said Liu, who was pitching for foreign investments.
Economists are generally hopeful about the opportunities China's reopening brings, as the global economy risks tipping into a widespread recession.
"China reopening will be important and stabilizing for the economy in the region," said HSBC's Herald van der Linde at a conference call on January 16. HSBC estimated that Chinese households stashed up 6.6 trillion Chinese yuan, or $977 billion, in the last three years, which they would be eager to spend due to pent-up demand.
However, China's abrupt reopening also comes with a human cost, as the country saw a rapid rash of COVID infections since December.
Beijing has reported nearly 99 million COVID infections and 119,000 deaths so far, according to the World Health Organization. In comparison, the US reported 101 million infections and 1.1 million deaths.
2. Beijing has toned down its 'common prosperity' rhetoric
Beijing's stance on "common prosperity" — a policy to redistribute China's wealth among its population — and its crackdown on real-estate and tech companies had hit China's wealthiest tycoons hard.
Some of the more prominent victims of the crackdowns were Hui Ka Yan, the boss of embattled Chinese developer Evergrande, and Alibaba founder Jack Ma.
Hui was worth $42 billion in 2017, but saw his net worth tank by 93% to about $3 billion as of January 19, per Bloomberg. Ma's net worth fell over 40% from its 2020 peak of $61 billion to nearly $35 billion as of February 14 after shares of the Chinese tech giant were battered amid the crackdown, per Bloomberg.
And now Beijing's stance is changing.
China has slowly been relaxing policies it has put to drive down debt and put the brakes on unfettered growth.
The US-based Asia Society Policy Institute analyzed the readout of the 2022 Central Economic Work Conference — which sets out China's economic policy agenda for the next year — and found that the term "common prosperity" was dropped. In contrast, the term was mentioned five times in the 2021 report.
"The decision in the 2022 report to delete any reference to what had (as recently as the 20th Congress Report two months earlier) been seen as a signature market intervention on the part of Xi Jinping represents a significant change," the think tank added.
On January 14, a Chinese central bank official said the country may relax the "three red lines" policy regulating debt ratios for property developers. This measure was introduced in August 2020 to limit leverage for property developers.
In January, a top Chinese central banker also suggested earlier that Beijing's tech crackdown is coming to a close. The crackdown sought to rein in the once free-wheeling sector with measures such as anti-monopoly probes and mandated cybersecurity reviews for foreign listings.
3. Moving away from the 'Wolf Warrior' diplomacy approach
Beijing also appears to be toning down on its combative "Wolf Warrior" approach to diplomacy, moving one of the most prominent advocates of this approach — foreign ministry spokesperson Zhao Lijian — to a department that manages land and borders, according to an official notice.
"Beijing is trying to reset domestic and international economic and political relations by toning down "Common Prosperity" and "Wolf Warrior" rhetoric and, more important, delivering stronger growth," wrote TS Lombard's Green in the January 11 note.
The "Wolf Warrior" approach to diplomacy — which is named after a popular movie franchise — describes an aggressive and confrontational approach to international relations.
This approach had consisted mainly of Chinese officials issuing harsh and sometimes-untrue statements in an attempt to garner support for the ruling party and undermine external critics, Insider's Alexandra Ma reported back in June 2020.
One example of this kind of hardline policy can be witnessed through a conspiracy theory posted by Zhao on Twitter in March 2020, wherein he said that the US army may have brought the coronavirus epidemic to the Chinese city of Wuhan.
Strong growth and consumption carry a hefty price tag
While China's policy shifts could be linked to its economic health and GDP growth, we should also bear in mind that this growth carries a hefty price tag.
Strong growth and consumption could bring with it inflation, which central banks are trying to tame. This may also end up complicating rate-hike efforts, Fred Neumann, the co-head of Asian economic research, said at the HSBC conference on January 16.
Nomura economists even said in their February 1 note that Beijing likely made the policy pivot reluctantly and may tighten some of its COVID measures when current economic, social, and political pressure abate.
"Over the past decade, China's policy pendulum has swung wildly between austerity and stimulus, and this time may be no different, especially given the need for top political leaders to regain lost ground after making substantial concessions both domestically and externally," they added.
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