China’s economy, which was recovering from the COVID-19 pandemic, is facing a new challenge: a sharp decline in business confidence. According to a survey by World Economics, China’s business confidence fell to its lowest level since January 2013 in the fourth quarter of 2022, reflecting the impact of surging COVID-19 cases and the abrupt lifting of many pandemic control measures. The survey results also hint at a possible recession next year, as the country’s growth momentum slows down.
COVID-19 Outbreaks and Policy Changes Disrupt Business Activity
One of the main reasons for the drop in business confidence is the resurgence of COVID-19 cases across China, which has hit hard the industrial and service sectors. The survey found that the index for export orders plunged to 40.9 from 48.7 in the previous quarter, below the 50 level that marks a contraction. About 32% of the respondents said their export orders declined, while another 54% said orders were unchanged.
The index for domestic orders also tumbled to 41.4 from 51.2 in the previous quarter, the first time in a year it was in contraction territory. The profitability index declined to 49.3 from 57.4 in the last quarter of 2021. The business climate gauge was at 53.3, compared with 56.8 in the previous quarter, with nearly 80% of the respondents saying their operation was “mediocre” or “rather bad”.
The survey covers more than 5,000 industrial companies across the country except for Tibet.
The sharp relaxation of strict COVID containment measures on Dec. 7 triggered a still-growing wave of domestic COVID cases, which has forced some cities to impose lockdowns, travel restrictions, and mass testing. The outbreaks have also disrupted supply chains, production, and consumption, as well as dampened consumer confidence and spending.
Another factor that has eroded business confidence is the policy uncertainty and regulatory tightening by the Chinese government, which has targeted several sectors such as technology, education, real estate, and entertainment. The crackdown has raised concerns about the future prospects of these industries, as well as the overall direction of China’s economic reform and opening up.
China Faces ‘Confidence Trap’ as Economic Recovery Loses Steam
China’s economy is at risk of being caught in a confidence trap as the post-Covid recovery loses steam, presenting Beijing with a problem that can’t easily be solved with traditional tools such as interest rate cuts and infrastructure stimulus.
A confidence trap is a situation where low confidence leads to lower investment and consumption, which in turn reduces growth and further undermines confidence. This creates a vicious cycle that is hard to break out of.
China’s leadership is aware of the problem, with the ruling party’s Politburo last month referencing low confidence as a challenge to the economy. The top officials upped their rhetorical support for private businesses, especially for the tech sector, and vowed to boost household income growth.
However, some analysts doubt whether these measures are enough to restore confidence and stimulate demand. They argue that China needs more structural reforms to address the underlying issues such as debt, inequality, environmental degradation, and innovation.
China’s Private Businesses Cry Out for More Policy Stability
China’s private businesses, which account for more than half of the country’s GDP and employment, are crying out for more policy stability from the government. They say that frequent and unpredictable policy changes have increased their operational costs and risks, and hampered their long-term planning and development.
In some cases, tension between the strategic goals of Beijing and interests of local authorities is undermining business confidence. For example, some local governments have imposed strict energy consumption quotas on factories to meet national carbon emission targets, forcing some businesses to shut down or relocate.
Some private entrepreneurs also complain about unfair treatment and discrimination by state-owned enterprises and banks, which enjoy more preferential policies and access to resources. They call for a level playing field and equal protection of property rights.
Some experts suggest that China should establish a more transparent and consistent policy framework that balances social welfare and economic efficiency, and respects market forces and private initiative.
