China’s Economy in the Year of the Tiger

For China, the year ahead holds special political and economic significance. From the Winter Olympics in February to the Chinese Communist Party’s 20th national congress, slated for the fourth quarter, “the world,” as President Xi Jinping has noted, “is turning its eyes to China.” That means China’s financial, environmental and economic policy aspirations, which have been complicated by the pandemic, will be closely scrutinized. Here’s what we see when we look in the eye of the tiger.

Zero-COVID Policy Comes Face to Face with Omicron

Since mid-December, a spike in COVID-19 cases in China has raised concerns that another coronavirus surge could disrupt the country’s economy, with ripple effects around the globe. Though China’s current outbreak pales in comparison to outbreaks in the US and UK, mass testing is under way and affected districts are being locked down under China’s zero-COVID policy. Since its inception in 2020, this policy has effectively limited the size and duration of outbreaks and helped to contain the virus’s spread, including the import of omicron. Nonetheless, the Lunar New Year travel crush—traditionally the largest annual human migration in the world—and the Winter Olympics in Beijing may pose challenges.

To make sense of the implications for China’s economy, we compared China’s coronavirus outbreaks to indicators of economic activity since the pandemic began. The winter 2020 and summer 2021 outbreaks weighed significantly on activity, particularly in the service sector (Display). But more recently, the impact has been smaller, though the number of cases is comparable. Why?

Vaccines may be one reason. With vaccination rates approaching 90%—compared to 60% in July—household risk aversion could be decreasing. Additionally, thanks to high vaccination rates and increased experience with the pandemic, local governments may have been able to deploy less Draconian measures to contain outbreaks, thus reducing disruption to consumption.

That said, the current coronavirus outbreak could weigh on consumption in the near term and represents a potential downside risk for the Chinese economy. But we don’t expect the government to initiate a nationwide lockdown as we saw in early 2020, which leads us to believe that the impact will be manageable.