China's Missing Post-Pandemic Rebound
The end of "Covid Zero" was supposed to lead to a burst of "revenge spending", at least after the virus had finished ripping through the population. Instead, the economy has continued to sputter.
For nearly three years, the Chinese government had suppressed the spread of the coronavirus through brutal lockdowns, constant mandatory testing, and forced quarantines. Then, in December, it gave up. At the time, many expected that newly-liberated consumers would power a robust recovery. Less positively, I and others feared that resurgent Chinese demand for energy and other raw materials would put upward pressure on prices and worsen inflation.
So far, neither has happened.
Instead, Chinese growth in 2023 has been anemic, especially relative to the starting point. So far this year, economic output was just 5.5% higher than in the first half of 2022, which in turn was up only 2.5% compared to the first half of 2021. Officially, China’s Gross Domestic Product (GDP) grew just 0.8% between 2023Q1 and Q2 compared to the 2017-2019 quarterly average of 1.6%. That would be bad enough, but there is also reason to think that output may actually have shrunk in the most recent quarter.1 Either way, things have gotten to the point that the People’s Bank of China (PBOC) has resorted to asking banks to voluntarily charge less interest on existing mortgages. (The banks have declined.)
This weakness has caught many investors by surprise: since mid-March, the Shanghai Composite stock index has underperformed the MSCI All-Country World Index by almost 20%, while the yuan has depreciated about 5% against most other currencies even though China has had much less inflation than elsewhere.
What happened?