China: A cyclical bounce meets that the cyclical bounce will be modest compared a structural downturn with those that followed the global financial crisis As in major developed economies, policy has in 2009 and the 2020 Wuhan lockdown, given the played and will play a large role in economic expected global recession, uncertainty around the outcomes in China, but for different reasons. exit path from COVID-19, the lack of willingness China’s economic fortunes are governed by and capacity to overstimulate the economy, and what we have termed an “impossible trilemma,” a structural slowdown of growth potential in the in which policymakers must balance three long run. competing priorities: maintaining a zero-COVID Policymakers have announced that they plan to policy (ZCP), ensuring financial stability, and prepare for reopening the economy by relaxing sustaining strong levels of economic growth. In COVID controls, promoting vaccine and drug 2022, policymakers focused on upholding ZCP development, and improving hospital facilities. and ensuring financial stability at the cost of This could engineer a long-awaited recovery in growth. As a result, we forecast GDP growth to consumption and service activities. Crucially, end 2022 at around 3%, well below the historical however, we think the exit from COVID-19 is average and official targets of 5.5%. In 2023, unlikely to be smooth, as China’s health care we expect that policymakers’ focus is likely to system remains vulnerable to large outbreaks. gradually shift away from maintaining a strict A gradual reopening is more likely in our view ZCP toward achieving slightly stronger economic as booster vaccination rates for the older growth levels. population improve and an mRNA vaccine This will most likely result in a cyclical bounce and/or effective treatment becomes widely in 2023 of 4.5% GDP growth with risks skewed to available, which should lead to a more evident the upside on that view, driven by gradual rebound in the economy following the National loosening of COVID controls and a stabilizing real People’s Congress (NPC) next March. estate sector (Figure I-24). Nonetheless, we believe FIGURE I-24 Cyclical bounce expected in 2023 as the zero-COVID policy is unwound and the real estate sector stabilizes a. 2023 cyclical GDP bounce decomposed b. Chinese GDP unlikely to fully recover to pre-COVID into drivers levels .% % n i  in .  nge Upside e r  Pre-COVID- g s hae n u . c b tren a s  h r m Downside c e gee c f . a o v t e en D on c m ti . o i h r s t COVID boost per  o p w e s f o v l r . Property boost i e om t v c P g ulae aseline e D . Global growth P l D G drag m D u G – –. C Dec. Dec. Dec. Dec. Dec. Downsde ase ase psde      Sources: Vanguard calculations, based on data from Bloomberg, as of October 31, 2022. Notes: The baseline assumes a gradual decline in COVID restrictions with the pace accelerating after the March NPC meetings, but no complete abolishment. It also assumes that real estate investment stabilizes but does not rebound. The downside scenario assumes COVID restrictions remain at pandemic highs by the March leadership meetings and decline gradually through year-end, plateauing at a high level. It also assumes real estate investment continues to fall but at a slower pace than in 2022. The upside scenario assumes COVID restrictions are largely abolished after the March NPC meetings while real estate investment has a modest recovery. 30