--- title: 'The first quarter of 2023 will be bad for China, says AEI''s Derek Scissors' source: 'https://www.youtube.com/watch?v=G4OGO6BPOfI' video_id: 'G4OGO6BPOfI' date: 2026-09-16 duration_sec: 220 channel: 'CNBC Television' --- # The first quarter of 2023 will be bad for China, says AEI's Derek Scissors > Source: [The first quarter of 2023 will be bad for China, says AEI's Derek Scissors](https://www.youtube.com/watch?v=G4OGO6BPOfI) ## Summary In this interview, Derek Scissors, an Asia economist at the American Enterprise Institute, discusses the current and future state of China's economy. He explains that the economic situation will worsen before improving, with COVID-19 spreading beyond major cities, and highlights the challenges China faces as a manufacturing and export powerhouse. He also outlines the strategic opportunity for the U.S. to diversify supply chains away from China. ### Key Points - **Economic Downturn Expected to Worsen** [00:12] — China's economy is currently deteriorating due to COVID-19, with the spread expected to peak in Beijing and Shanghai in early January, but other cities and rural areas will continue to be affected for at least two more months. - **Stock Market Rally May Be Premature** [00:56] — The stock market rally may be pricing in a recovery expected around March, but the starting point is low, with 2022 GDP growth likely around 2.5% versus a 5.5% target, so improvement may not help until well into 2023. - **China's Manufacturing Position Threatened** [02:01] — China's position as the world's premier manufacturer and exporter has been hit by multiple blows since 2019, including Xi Jinping's crackdown on the private sector, zero-COVID policies, and a creaking healthcare system, prompting foreign firms to diversify. - **U.S. Opportunity to Diversify Supply Chains** [02:44] — The U.S. has an opportunity to attract industries out of China, but must prioritize which sectors (e.g., semiconductors, rare earths, batteries, pharmaceuticals) and decide whether production should return to the U.S. or be located in friendly countries. ### Conclusion China's economy faces a rough patch ahead, but a recovery is expected by spring. The U.S. can capitalize on this by strategically diversifying supply chains, using the semiconductor initiative as a template for other industries. ## Transcript But the contraction between now and then could still be stark, and China's whole economic strategy, meanwhile, is shifting. Let's bring in Derek Scissors, American Enterprise Institute's Asia economist. It's great to see you again, Derek. Welcome. Thank you. So why do you say, first of all, it could get worse before it gets better for China? Well, it's in the process of getting worse now. COVID, you know, zero COVID was a problem, and COVID is actually a bigger problem, which is why China had zero COVID for a long time. people are saying, hey, I think COVID is going to peak in Beijing and Shanghai in early January, but Beijing and Shanghai are not China. There's still plenty of COVID spread left in cities around the country and then in urban areas, sorry, in rural areas after that. So we have at least two more months of bad economics where work is interrupted. The retail you're talking about in China doesn't work because people don't want to go to stores. Then we should see a very sharp recovery, but it's several months away countrywide. Wow. So a lot of people might be getting ahead of themselves then if they're thinking, hey, you know, or maybe not. If you said, well, the stocks are pricing and what's going to happen in three months time, maybe they're fine to be rallying now on this. What do you say? Well, it depends on what you think the base is here. If you just want to rally, OK, there's going to be improvement in everybody's prospects roughly in March. It's going to last for about a year. So that's great. But where are you starting from? You know, you guys just talked about a 5.5% target for 2022. They'll be lucky if it's 2.5%. The first quarter next year is going to be bad, whatever China reports, even though it'll be getting better by the end. So if you think you're climbing out of a two-foot hole, then great. That one way to play stocks But if you climbing out of a 10 hole maybe that improvement doesn really help you until well into 2023 Very interesting And what the larger shift that you think is at play here Well I think we had a number of blows to China as a manufacturing and export powerhouse I mean they're the premier manufacturer and the premier exporter in the world. So they have built up a lot of credibility and a lot of advantages. One of the blows is going all the way back to 2019. Xi Jinping gets mad at his own private sector. Then we have zero COVID. Now we have the Chinese health care system creaking. All of these things are what foreign firms, at least, and maybe some Chinese firms are looking at saying, I need to diversify out of China. So the battle the Chinese are going to have is they want control of those supply chains. They want to be the top of the food chain in manufacturing. This is the first time in a while their position's been threatened. They still have some advantages, but we've seen multiple blows to their position in the last three years. What should the U.S. do in response to that, do you think? Well, I think there's an opportunity here for the kind of diversification out of China that we want economically, politically, militarily. And we have to play that right. We have to decide, first of all, what are our priorities? What industries do we want to attract out of China? We've taken a step to that with regard to semiconductors and the Chips and Science Act with the past Congress earlier this year. We have to decide where are our other priorities. Is it rare earths? Is it batteries? You know, Is it pharmaceuticals, which is where I would put the priority? And then the next step is we have to decide, do we want this stuff to come back here? Or is it OK to be made in North America? Is it OK to be made in Australia or someplace else that we consider a friendly country? So there's an opportunity here for the United States. And we have to pick our priorities and who we want to come along with us. Sure. And maybe what we've done on semiconductors is a template of a lot more of those kinds of actions. Derek, for now, thanks. It's always good to hear from you. We appreciate it. Good to see you. Derek Scissors with AEI.