What's wrong with China's post-covid recovery and how to deal with it?

Following the sudden lifting of covid restrictions at the end of 2022, the Chinese economy had a strong rebound in early 2023. However, growth momentum quickly lost steam after the initial surge. Manufacturing PMI dropped into contraction territory again in April, along with a broad-based weakening of most economic indicators in the following months.

An intriguing question is “why?” After all, almost every country in the world has experienced a post-covid rebound, but why did the recovery in China lose momentum so quickly, when there is obviously still a lot of slack in the economy (as shown by weak inflation)?

Several major shocks happened almost simultaneously over the three years since 2020, hitting different parts of the economy. Hence, while lifting the covid restrictions was a major positive, it has proven to be insufficient to lead to a sustained rebound of the economy. Among these shocks, the hard landing of the housing sector has probably caused the greatest damage.

While we expect the Chinese government and the central bank to provide more policy support in the coming months, the measures will likely be targeted and delivered in a piecemeal manner and be of modest magnitude.

Hence, the trajectory of China’s post-covid recovery will likely be even flatter and longer than we had earlier expected.