China will take ‘a very measured approach’ to zero-COVID exit, expert says

Council on Foreign Relations' Zongyuan Zoe Liu and Control Risks Partner Dane Chamorro join Yahoo Finance Live to discuss China's zero-COVID policy, the outlook for growth and pent-up demand, and how multinational companies will need to navigate challenges in the country.

Video transcript

RACHELLE AKUFFO: Well, let's take a 20,000-foot view of this situation. We have Zongyuan Zoe Liu, Council on Foreign Relations fellow for International Political Economy, and of course, we have the author of "The Sovereign Funds, How the Communist Party of China Finances Its Global Ambitions." Also joining us is Dane Chamorro, Control Risks partner and head of Global Risk Analysis and Business Intelligence Practice. Zoe, I want to first start with you, in terms of what you saw as a real tipping point here that led to this dialing back of zero-COVID.

ZONGYUAN ZOE LIU: Yeah, thank you very much, Rachelle, for this great question. I would say there are a couple of factors at play on the COVID and the supply chain shock perspective. To begin with, the protest and COVID-related things, exactly as you just pointed out, the fire in Wulumuqi, the capital of Xinjiang, really sparked the protest. But it really reflected a deeper frustration and emotion, the emotional level of social anxiety, and in particular, Chinese people's uncertainty and, to a large extent, of the loss of confidence in the economic future.

And for example, we've already seen discussions about the possibility of even civil service people getting a potential pay cut. So from that perspective, the-- as you were earlier talking about, the economic slowdown from 5.5% target, not being able to meet it, but a slow down to around a 3% or 3.3%. But that number is actually being painfully felt at the individual level.

AKIKO FUJITA: So, Dane, when you think about the protests and how they played out, we have seen them quiet down since the government signaled that they are going to back off the zero-COVID policy. I wonder if you think there is a risk on the government side in responding to that. They haven't necessarily said, yes, we hear you. We're going to change it because of you. But it did have an effect. And the zero-COVID policy, in many ways, has been, really, the key to Xi Jinping, the Communist government, being able to have such a tight grip over the last three years.

DANE CHAMORRO: Well, I think China was going to exit this policy at some point. The question was when and how. And the Chinese model for pretty much all things is a very measured approach. So I don't think anybody should take away from this that it's going to be an overnight black and white difference between what came a few weeks ago versus what will come now. It will be a measured, stepped approach across the country.

And of course, again, China is a huge country, so you have huge disparities between different parts of China. And what you'll see is them taking a couple of steps forward if they need to, but perhaps taking a step back.

But fundamentally, I think what you're going to see is that by the second half of next year, after the Lunar New Year, which comes in January, and after the National People's Congress meets that happens every year in March, April-- [CHINESE] as they call it in Chinese, you're going to see the economy come roaring back because there's a huge amount of pent-up demand, just as we saw in other parts of the world, as those economies opened up after certain types of restrictions.

Demand came roaring back. And the trick will be for businesses, particularly, will be, can you keep up with the demand? We saw that outside of China as different economies opened up. But as you alluded to, the Chinese economy is so huge, this demand will come back. And the capacity, the trip will really be key-- maintaining capacity domestically to service that demand that comes roaring back in the second half of next year.

RACHELLE AKUFFO: And Zoe, a lot of people are wondering, is there a way to quantify just how much economic damage has been done by zero-COVID? And as we said, this is a slow unfolding. And you're saying, even with COVID being a priority, there are four other D's that are tied to the Chinese economy that are also on the table. You have demand, debt, decoupling, and demography as well.

ZONGYUAN ZOE LIU: Yeah, thank you very much, Rachelle, for mentioning-- referencing an article that I wrote last month. Absolutely, a lot-- exactly as Dane pointed out, as China slowly reopens, we will probably see a temporary or short-term rebound, just exactly as what happened here in the United States or elsewhere in the world. However, it does not necessarily solve the long-term structural problems.

And on top of that, if we just think about the cost of zero-COVID or the unmaterialized GDP cost, right, so if we think-- just do a quick back of the envelope calculation, the Chinese economy is somewhere between 17 and 7-- $17.7 trillion. And if we say, like, 2.2 cost, because the economic target was 5.5%. And now let's say, optimistically, it's 3%. So we are talking about somewhere between 2% or 2.2% loss in GDP, and that is somewhere between $380 billion.

So that's not a significant amount of money. And on top of that, we're also talking about a lot of major global companies thinking about pulling out of a China or even have accelerated there, pulling out of China. So from the long-term perspective, both international factors and domestic factors probably is going to make the Chinese economy in the long run not necessarily going to materialize the so-called 8% growth potential, as some Chinese economists might have optimistically estimated.