China Beige Book International Managing Director Shehzad Qazi breaks down China's path to reopening and economic recovery in 2023 amid surging COVID-19 cases and manufacturing pauses.

Video Transcript

SEANA SMITH: China is ending its zero-COVID policy after three years of lockdowns with plans to reopen its borders and scrap quarantine rules for international travelers. Now here to discuss what this means for China's economic recovery, we want to bring in Shehzad Qazi. He's China Beige Book's international managing director. Shehzad, great to see you again. So let's talk about what this means for China's economy, how quickly the economy there is expected to recover. What do you think?

SHEHZAD QAZI: Yeah, hi, good to be with you. You know, I think first things first, the question is no longer about the speed with which China reopens. The real question now is how quickly can Beijing undertake the policies that are necessary for it to gain control of the virus, which primarily means being able to vaccinate the vast majority, at least, of its population, starting with folks in the urban areas, and create the conditions which allow people to actually participate in the reopening because that is ultimately what is going to drive this recovery.

We have to keep in mind that right now, we haven't hit the peak of COVID cases. That is still ahead of us, which means that some of the bad news is still ahead of us. And until we are past that point, we can't really start talking about an economic recovery. Right now, we're just talking about getting this engine started. We're nowhere near being off to the races right now.

PRAS SUBRAMANIAN: Hey, Shehzad, so how optimistic are you that China can actually get to that point where they're actually immunizing a lot of their citizens to the point that they have kind of a herd immunity?

SHEHZAD QAZI: Yeah, look, I think the first two quarters of next year are going to be critical because that's where-- we're talking about very large population. That is, if there's a serious effort made towards inoculations and boosters and so forth. That is going to take a lot of time.

The next six months, or rather, I should say, the first two quarters of next year, are also going to be critical because they're going to help us understand just how long the Chinese economy needs to fully rebound. I'm optimistic that we're going to start seeing some positive signs of recovery on the consumption side and so forth. But we are in a pretty deep hole right now, especially when you look at the property market. It is struggling. By all accounts, the Chinese economy is very, very weak. This is not an overnight recovery story.

SEANA SMITH: And Shehzad, speaking of the deep hole and what is currently playing out right now in China, we've certainly gotten from China's leadership, at least recently, over the last couple of weeks, the clearer pro-growth tone from them. Is it too little too late when it comes to investors or attracting the international investors that were once very interested in China?

SHEHZAD QAZI: Look, I think the markets are incredibly bullish on China once again. And as a matter of fact, they are bullish before the data have shown any signs of turning. Now what we want to wait and understand is what exactly is the nature of this pro-growth policy? Because we often hear these statements coming out of Beijing, but the actions are not aligned, right?

So how much monetary stimulus do we get? How much fiscal stimulus do we get? I think we are starting to see certain amounts of support within the property sector for sure for the developers who are now taking over these bad projects, who are not going to be helping sort of rescue the homes and stuff that have to be delivered to households. So you're seeing some of the massive support from them in the credit sector, or rather, through credit provision. We have to see how much bigger this gets.

One thing, though, I do want to point out. Let's say you get a pro-growth set of policies next year. You get a good amount of stimulus in the economy next year. You see a resuscitation of the economy. The overall environment is not a good one. If you're seeing a slowdown in the US and abroad elsewhere, that's not very good for Chinese growth again.

PRAS SUBRAMANIAN: Given the sort of unknowns we have going on right now, do you think you'll see some multinational companies sort of pull out their supply chains and go somewhere else in Asia or even Africa or South America?

SHEHZAD QAZI: Yeah, I think supply chain diversification is certainly something that is and should be top of mind for corporate decision makers. I think the interruption to day-to-day operations that we're getting right now in China, what we saw happen with the, quote, unquote, "iPhone city" and with Apple, I think, just goes on to show that lack of clarity on the policymaking front in China does at times make doing business a little bit harder. So I think some of that supply chain diversification is going to be happening.

On the other hand, of course, you have a Congress. You have Washington, DC, which is actively and aggressively, I think, in certain ways, thinking about supply chain diversification as far as critical industries are concerned. So certain industries will have no option, I assume, in the coming years, but to really seriously think about this.

SEANA SMITH: And Shehzad, when it comes to, kind of going back to what you were saying before, just the fact that we will likely see cases rise pretty substantially, talking about some of the fallout that we could get as China does reopen its borders, when, I guess, putting that collateral damage in perspective, what more, I guess, more specifically, do you think that reopening is going to look like? And then when it comes to the economy, is there a risk then that the economic conditions there will deteriorate even further before we start to see some improvement?

SHEHZAD QAZI: Yeah, I think that's exactly it. I think what the data are going to continue showing is that the economy is going to slow down. Additionally, we're looking at things getting worse, exactly as you said, before we start to see a recovery. I think Chinese businesses will need to see some amounts of macroeconomic stability before they feel confident to hire again, to invest again.

Chinese households need to see and make sure that there is stability on the policymaking front, as well as improvement on the COVID situation, before they feel comfortable to start digging back into their savings and to go out there and spend again. So I think we're looking at a slower recovery than perhaps has been anticipated by investors so far.

PRAS SUBRAMANIAN: Shehzad Qazi, thank you so much for joining us.