China's Covid pivot may be damned by faint praise

HONG KONG – Beijing's abandonment of its draconian zero-Covid policy has reassured markets and calmed protesters, but it may not do much for the economy.

It is one thing to stop harsh lockdowns and ease travel restrictions. Persuading households that hoarded US$1.9 trillion (S$2.6 trillion) this year to spend will be far more difficult.

Sun Chunlan, China's top pandemic official, suggested the central government was backing off on President Xi Jinping's controversial "dynamic zero-Covid" policy last week, and Xi echoed that to foreign visitors including European Council President Charles Michel, according to a Reuters report citing unnamed EU officials.

Municipalities have already started relaxing lockdowns and easing up on testing. The blue-chip CSI 300 Index jumped 1.7 per cent in the Monday morning session, while Hong Kong's battered Hang Seng Index climbed 3.5 per cent.

Cities desperately want budgetary relief from expensive testing and quarantine enforcement mandates, and to revive business investment and consumption.

Retail sales hit a five-month low in October, falling back into contraction; property – which accounts for a quarter of economic activity – has seen sales plunge 26 per cent in the first 10 months.

The question is how much of a boost combined efforts to relax zero-Covid and prop up the real estate sector will have.

In the most optimistic scenario, the reopening is swift and the medical system manages to digest the inevitable explosion of new cases without a spike in deaths.

Citizens would surge into restaurants and theatres, buy train tickets to visit family and friends, and jet off to vacation abroad, relieving tourism-dependent economies like Thailand. They would also step back into the housing market.

This is unlikely. Thanks to lockdowns and financial volatility, citizens added over 13 trillion yuan (S$2.5 billion) to their savings in 2022 in an economy with one of the world's highest savings rates. Household deposits totalled nearly US$17 trillion by October.

Were urban households to draw down half of the excess savings accumulated since 2020, Standard Chartered analysts estimate it would add one percentage point to growth in 2023. A property revival would be even more statistically beneficial.

Yet a shopping boom seems unlikely, especially if China experiences a major outbreak as a result of looser controls.

As for real estate, the government seems more focused on minimising defaults than reviving prices. Chinese people might take some time to end self-imposed austerity.

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