China's economy grows just 3% in 2022, second-lowest in 40 years

China's economy expanded by just 3 percent in 2022, marking the second-weakest year of growth in at least four decades. The figure, released Tuesday by official statistics, represented a sharp deceleration from the prior year's 8.1 percent expansion and reflected the combined weight of two major drags: the government's strict zero-COVID lockdown policies and a collapsing real estate sector that had long served as an engine of national growth.

The slowdown rippled outward. China, the world's second-largest economy, is a crucial buyer of raw materials and manufactured goods. When its appetite contracts, so does demand for oil, food, semiconductors, and consumer products from suppliers across the globe. Trading partners already bracing for recession in Western markets now faced the additional headwind of reduced Chinese purchasing power. The only year China had performed worse in recent memory was 2020, when the pandemic first struck and growth fell to 2.4 percent.

The deterioration accelerated as the year progressed. In the final three months of 2022, the economy grew at just 2.9 percent compared to the same period a year earlier—down from 3.9 percent in the previous quarter. Consumer spending, the metric economists watch most closely, remained anemic even after the Communist Party abruptly abandoned its zero-COVID restrictions in December. Retail sales fell 1.8 percent in December compared to a year earlier, though that represented an improvement over November's 5.9 percent contraction. Shoppers were returning to malls and restaurants only tentatively, spooked by a fresh wave of COVID-19 infections that had overwhelmed hospitals.

The zero-COVID policy itself had become a source of public fury. For nearly three years, the government had pursued an approach of isolating every confirmed case, shutting down entire cities for weeks or months to contain outbreaks. Shanghai endured a two-month lockdown in early 2020. When a new infection wave emerged in October 2022, authorities reimposed the same draconian measures—closing factories, confining millions to their homes, and blocking most travel in and out of the country. The restrictions sparked visible protests in Shanghai and other cities. Some demonstrators openly called for Xi Jinping, China's paramount leader, to step down. The party's sudden reversal in November, followed by the formal end of zero-COVID controls, was a tacit acknowledgment that the policy had become politically unsustainable.

Yet the damage to the real estate sector proved harder to reverse. The industry accounts for as much as 25 percent of China's economic output, but tighter controls on developer debt—imposed starting in 2021 to address what leaders viewed as dangerously high leverage—had triggered a cascade of failures. Smaller developers went bankrupt. Larger competitors missed bond payments. Buyers, uncertain whether their chosen developer would survive, stopped purchasing homes. Sales plunged. The most indebted company in the global real estate industry, Evergrande Group, was attempting to restructure more than $300 billion in obligations to banks and bondholders, a process whose outcome remained uncertain.

Broader structural headwinds also weighed on growth prospects. China's working-age population—people aged 16 to 59—had shrunk by roughly 5 percent from its 2011 peak, falling to 876.6 million in 2022. As a share of the total population of 1.4 billion, the working-age cohort had dropped from 70 percent a decade ago to just 62 percent. An aging, shrinking workforce meant fewer workers to drive productivity and fewer consumers to fuel demand. Additionally, Western governments had begun restricting Chinese access to advanced semiconductors and other critical technologies on national security grounds, a constraint that would persist regardless of economic cycles.

In response to the slowdown, the ruling party reversed course on several fronts. It had spent years cracking down on monopolistic practices in the tech sector and tightening controls over data, a campaign that had erased hundreds of billions of dollars from the market valuations of giants like Alibaba. Now, seeking to revive growth, it began winding down those restrictions. It also loosened controls on real estate financing, hoping to unlock credit and stabilize the housing market. On Saturday, the Cabinet announced tax cuts, bank loans, and other support for entrepreneurs. Economists offered cautiously optimistic forecasts. Goldman Sachs raised its 2023 growth projection to 5.2 percent from 4.5 percent, betting that the reopening would unleash pent-up demand. The International Monetary Fund and most private forecasters expected growth around 4 to 5 percent this year. But the World Bank, citing lingering uncertainty about COVID-19 and the fragile state of real estate, was more conservative, cutting its forecast to 4.3 percent. Regardless of which estimate proved accurate, the consensus was clear: China's days of double-digit growth were over. The long-term trajectory pointed toward expansion capped at around 4 percent through the remainder of the decade.