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What’s Happened to China’s Economy?

Since Deng Xiaoping launched China's economic reform in 1978, policymakers have usually managed to strike a dynamic balance between local-government accountability and innovation. Today, however, centralization is encouraging local officials to keep their heads down, with serious implications for China's growth prospects.

SHANGHAI – In January, China’s government forecast that the country’s economy – which, at the time, was experiencing a strong rebound after the initial pandemic slowdown – would grow by 5.5% in 2022. But by the second quarter, unfortunately, the rapid spread of the Omicron variant of COVID-19 had forced the government to implement emergency containment measures in its most economically dynamic cities, including Beijing, Guangzhou, Shanghai, and Shenzhen.

The two-month Shanghai lockdown, in particular, dealt a devastating blow to growth, as the entire Yangtze River Delta was effectively sealed off from the global economy. It also shook business and investor confidence. Even if they still have faith in the Chinese economy’s long-run prospects, too many entrepreneurs and investors – both foreign and Chinese – have become more cautious than ever in doing businesses there, at least in the short run. The effects of this shift will be certain to persist, even after economic activities – which have not recovered more than three months after the lockdown was lifted – return to their previous level.

It looks like what happened to the economy since March was avoidable. The fact is, despite being pursued only to a limited extent, local-level policy innovation helped Shanghai to minimize the pandemic’s economic impact in the two years preceding the March 2022 lockdown. Given this, it is reasonable to consider the role that such innovation could play in mitigating damage to the business and investment environment caused by pandemic-containment measures.

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