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China – A bumpy path to reopening Aidan Yao mutate turning the pandemic to endemic, which may already Senior Economist (China) be the case outside China. Second, and related, the medical Macro Research – Core Investments response has to adapt for a long fight against a constantly changing enemy. The brutal lockdown in Shanghai, which brought China’s largest city to a standstill, was a painful lesson Key points that achieving zero infections against a highly transmissible virus will inflict tremendous economic and social costs (Exhibit 11). • China’s economic outlook continues to hinge on the Calls for an exit from the Zero COVID Policy (ZCP) have since path of the pandemic and Beijing’s response grown as China becomes isolated from the rest of the world. • We expect the authorities to pave the way for a reopening, but that path will be bumpy and uncertain Exhibit 11: Economy at the mercy of the pandemic • Falling exports – partially offset by a less bad property China - Covid lockdown index and impact on activity market – call for continued policy accommodation Index % of GDP 90 0 80 -1.7% -5 70 -4.8% COVID-19 response fails to keep up with virus 60 -8.6% -10 50 Annual average impact -15 Three years into the COVID-19 pandemic, while most countries 40 Lockdown index [Lhs] -20 have exited emergency responses, China remains wedded to a 30 Impact on growth [Rhs] -25 rigid containment strategy. 2022 was a particularly difficult year 20 for the Chinese economy, with the impact of rolling lockdowns 10 -30 exacerbated by a collapsing housing market and stiffening 0 -35 external headwinds – manifested in rising food and energy Jan-2020 Jul-2020 Jan-2021 Jul-2021 Jan-2022 Jul-2022 prices, escalating geopolitical tensions, and tightening global Source: CEIC, Goldman Sachs and AXA IM Research, 16 November 2022 financial conditions. Beijing has tried to mitigate these shocks by easing counter-cyclical policies and finetuning its COVID-19 Beijing’s reluctance to change is likely a result of three response after the Shanghai debacle. But those moves have considerations. Medically, China is not ready to exit the ZCP failed to prevent a steep decline of economic growth. With with a low immunity rate among its vast population and limited annual GDP gains expected to more than halve to about 3% medical resources, which could prove insufficient to deal with from 8.1% in 2021, Beijing is set to miss its growth target for increased severe cases upon reopening. Economically, the ZCP the second time in three years. had been seen as a success not long ago for contributing to China’s growth outperformance and gains of export market The outlook for the economy will continue to hinge on the share before this year. Finally, altering a policy, extolled as an emblem of China’s superior governing system ahead of a once- evolution of the pandemic and Beijing’s response. Continuing in-a-decade leadership reshuffle, was seen as unwise politically. with draconian controls against repeated COVID-19 flare-ups will likely prolong the economic stress, creating permanent scarring These arguments, however, have been weakened by recent in the economy and society. The housing market remains a wild events. The economic calculation has clearly shifted, reflected card, as it struggles to find a bottom against depleting home- by the higher costs of tackling Omicron compared to the Alpha buyers’ confidence and acute financial stress among property or Delta variants. Meanwhile, the conclusion of the 20th Party developers. Exports – once a strong engine of growth – have also Congress has helped remove a major political uncertainty and started to sputter and will likely lose further steam as developed economies fall into recession. These challenges will complicate refocus the party’s attention on its core objective of delivering Beijing’s counter-cyclical policies and make next year’s outlook growth and prosperity. The remaining hurdle is weak medical more uncertain than usual. Below, we explain in detail these defences. Hence, moves to build such a defence should be seen four drivers of the economy and the risks to our assessment. as preparation for an exit from the ZCP. Changing tack to reprioritise the economy Our baseline view for 2023 rests crucially on the assumption that the ZCP will be adjusted for an eventual reopening of the economy. We see this proceeding in three phases. Phase one Starting with the pandemic, developments over the past year focuses on getting the public medically and mentally ready for a have likely brought two revelations to Beijing. First, the virus is change. This involves raising the vaccination rate (particularly unlikely to disappear any time soon, and could continue to for the elderly), introducing antiviral drugs, constructing more 16

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