PERSPECTIVE3-5 min to read

Zero-Covid U-turn brightens China’s outlook

China’s pivot on Covid policy creates near-term uncertainty amid fears of an exit-wave of infections, but looking further ahead, a handbrake on activity has been lifted.



David Rees
Senior Emerging Markets Economist

China-watchers have been caught off guard by the rapid shift away from zero-Covid policy in recent weeks, which has driven a strong rally in local markets.

A general consensus had formed that stringent measures to contain the spread of Covid-19 would remain in place at least until the spring. But the government has torn down many of the most restrictive requirements in the wake of October’s National Party Congress and some social unrest.

Removing restrictions implies that the number of Covid-19 infections in China will increase in the weeks ahead. After all, virtually every country that has transitioned away from some kind of restrictions has suffered an “exit wave” of rising infections.

There is a lot of uncertainty about how rising infections will affect China’s economy. The government has shifted the tone of its communications regarding the danger posed by the Omicron variant. However, relatively low vaccination rates among the elderly, along with general fear of infection, mean that there is a clearly a risk that a large exit wave could have a negative impact on activity. Indeed, a further decline in the various November purchasing managers’ indices (PMIs) coincided with a sharp rise in Covid infections that appears to have hit the services sector particularly hard. This may worsen in the near term.


In our recent forecast update we downgraded our expectations for Q4 growth for exactly these reasons, which reduced our full-year forecast for GDP growth in 2022 to just 3%.

However, at that time we remained relatively optimistic on the outlook since we continue to expect the economy to benefit from a cyclical recovery and expected GDP growth of 5% in 2023 and 4.2% in 2024.

The recent softening of Covid policy means that the risks to our forecast have now tilted to the upside, something that we started to track with our “China rapid re-opening” scenario.

There is a lot of uncertainty about how much disruption will be caused by the exit wave of infections. But ultimately, relaxing Covid restrictions will release the handbrake that has been holding back activity and allow for better transmission of existing policy support. Any further support for the housing market would clearly also be helpful.

As the grid below shows, the rapid reopening scenario is reflationary for the global economy. China’s large weight means that faster growth there would mechanistically lift world GDP growth. But the benefits are unlikely to be felt evenly. After all, the fact that China runs large external trade surpluses (exports more than it imports) means that it is not a major source of final demand and to the extent it does consume goods, this is concentrated largely in the commodities space.


This suggests that while commodity producers may feel some benefit from stronger activity in China, other economies may not. For example, the US runs a huge trade deficit with China and does not derive much growth from bilateral trade. And the fact that stronger demand in a reopening scenario is likely to be skewed towards services – something that has been evident around the world – suggests that growth in China will be less commodity-intensive than during past recoveries. Indeed, the eventual opening-up of China’s borders may mean that tourism destinations benefit as much as commodity producers.

Subscribe to our Insights

Visit our preference center, where you can choose which Schroders Insights you would like to receive

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.


David Rees
Senior Emerging Markets Economist


Economic views
Asia ex Japan
Follow us

Please consider a fund's investment objectives, risks, charges and expenses carefully before investing.

The website and the content included is intended for US-based financial intermediaries (and their non-US affiliates) on behalf of those of their clients who are both (a) not “US persons” as that term is defined in Rule 902 under the United States Securities Act of 1933, as amended (the “1933 Act”) and (b) “non-United States persons” as that terms is defined in Rule 4.7(a)(vi) under the Commodity Exchange Act of 1936, as amended. None of the funds described herein is registered as an “investment company” as that term is defined in the United States Investment Company Act of 1940, as amended, and shares of the funds described herein have not been and will not be registered under the 1933 Act or the securities laws of any of the states of the United States. The shares may not be offered, sold or delivered directly or indirectly in the United States or for the account or benefit of any “US person.”

The information contained in this website does not constitute an offer to purchase or sell, advertise, recommend, distribute or solicit a subscription for interests in investment products in any Latin American jurisdiction where such would be unauthorized. The information contained in this website is not intended for distribution to the public in general and must not be reproduced or distributed, entirely or partially to any individuals who are not allowed to receive it according to applicable legislation. The investment products and their distribution may not be registered in Latin America, and therefore may not meet certain requirements and procedures usually observed in public offerings of securities registered in the region, with which investors in the Latin America capital markets may be familiar. For this reason, the access of the investors to certain information regarding the investment products may be restricted. Financial intermediaries and Advisors must ensure the information provided in this website is appropriate and suitable to the receiver’s domicile and jurisdiction and according to the applicable legislation.

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security/sector/country.

Issued by Schroder Investment Management (Europe) S.A., 5 (“SIM Europe”), rue Höhenhof, L-1736 Senningerberg, Luxembourg. Registered No. B 37.799

Schroder Investment Management North America Inc. (“SIMNA”) is an SEC registered investment adviser, CRD Number 105820, providing asset management products and services to clients in the US and registered as a Portfolio Manager with the securities regulatory authorities in Canada.  Schroder Fund Advisors LLC (“SFA”) is a wholly-owned subsidiary of SIMNA Inc. and is registered as a limited purpose broker-dealer with FINRA and as an Exempt Market Dealer with the securities regulatory authorities in Canada.  SFA markets certain investment vehicles for which other Schroders entities are investment advisers.

Schroders Capital is the private markets investment division of Schroders plc.  Schroders Capital Management (US) Inc. (“Schroders Capital US”) is registered as an investment adviser with the US Securities and Exchange Commission (SEC).  It provides asset management products and services to clients in the United States and Canada.  For more information, visit

SIM (Europe), SIMNA, SFA and Schroders Capital are wholly owned subsidiaries of Schroders plc.