Fast, precise, too tough? Lockdowns risk stalling China’s economy

Show caption A medical worker collects a swab amid the coronavirus outbreak in Shanghai. Photograph: Reuters Chinese economy Fast, precise, too tough? Lockdowns risk stalling China’s economy Strict response to virus buckles supply chains, hits consumers and sends unemployment soaring Vincent Ni Sat 23 Apr 2022 07.00 BST Share on Facebook

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Veteran lorry driver Meng Hong has become an unlikely social media star in recent weeks. Since March, his short video talks about life on the road during Covid outbreaks on Douyin, the Chinese version of TikTok, have won him millions of likes.

Most of Meng’s videos had been about “spreading positive energy” as he wrote in his account description. But on 13 April, he began to complain about what happened when drivers transported goods to Shanghai. “After we have delivered food, we were quarantined [after we left] or locked down in Shanghai,” he revealed in an animated video tirade.

As China’s most populous city entered a strict lockdown this month, local governments in neighbouring areas erected roadblocks and closed highways to curb potential spread of Omicron, leaving logistics chains woefully disrupted. “As long as you have had a trip to Shanghai, very few other cities would allow you to enter,” Meng complained. Drivers were now refusing to go there, he reported.

The post resonated across China and is a microcosm of the uncertainty the world’s second-largest economy is facing right now. The ruling party’s zero-Covid policy has so far resulted in at least 45 cities experiencing some form of lockdown, and Beijing shows no sign of changing course on its effort to eliminate the spread of the virus.

‘Companies need signs of stability’

A man in protective gear rides a scooter on the street in Shanghai. Photograph: Alex Plavevski/EPA

Last Sunday, inhabitants in the six urban districts in Wuhu, a city of 3.6 million in eastern Anhui province, woke up to a sudden lockdown after one student at a school tested positive the previous day. The officials say they operate on a three-word principle in tackling this kind of situation: fast, precise and tough.

But the unpredictable nature of such a practice has inevitably led to economic losses as lockdowns have affected 50% of China’s total output, according to local economists.

Chinese and foreign firms have been equally affected. According to a recent survey by the German Chamber of Commerce in China, only about 7% of German firms surveyed reported no impact in their Chinese business operations as a result of Covid-19. And factoring in the geopolitical tensions, one-third of the respondents said they were putting planned business or investments in the country “on hold”.

“What companies need now are signs of stability,” the chamber said in a recent report that also urged leaders at the European Union to raise their concerns with Chinese decision makers. “Being in the middle of the current Covid-19 wave in China, the German business community strongly needs an indication of the direction of the government’s Covid-strategy, to minimise the severe impact on business operations and supply chains.”

‘Growth recession’ warning

Shanghai’s Yangshan port. Photograph: Xinhua/REX/Shutterstock

Beijing set its annual GDP growth target last month at “around 5.5%”, but this is looking increasingly like a tall order, economists say. In the past week, the International Monetary Fund (IMF) slashed its forecast for the world’s second-largest economy this year to 4.4% as China begins to feel the implications of Russia’s invasion of Ukraine as well as the lockdowns.

On Thursday, Nomura went further, cutting its forecast of China’s annual growth from 4.3% to 3.9% this year. With no relaxation of the severe containment strategy in sight, the Japanese firm said its baseline estimate is that China’s second-quarter growth would only expand by 1.8%.

Consumption and net exports are two drivers of China’s economic growth, said Mary Lovely, head of the China programme at the Peterson Institute for International Economics in Washington DC. “[But] when we look at those two drivers going forward, we see some serious danger signs,” she said, warning that China could experience a “growth recession” in the current quarter. A “growth recession” refers to an economy at slow growth but with rising unemployment.

Delivering economic growth has always been crucial to the legitimacy of China’s ruling communist party. This is particularly the case in 2022 as the five-yearly party congress is to be held in the autumn. President Xi Jinping is expected to continue his rule, in an extraordinary break with previous norms.

Stability – politically as well as economically – is key to Beijing’s rulers. But lockdowns, risk of disease, and uncertainty are dampening consumption and investment that could create jobs, Lovely added.

According to China’s own data released this week, the economy has been experiencing headwinds since last month, when Omicron began to spread. The unemployment rate in 31 major Chinese cities reached 6% in March, a record high. Among those aged 16 to 24, joblessness hit 16%, reaching the highest level in eight months.

Particularly among younger workers, unemployment is a matter of deep concern to the authorities as it fuels social discontent, said Lovely. “It also means lost experience for these future workers, and lower lifetime productivity and earnings. Training young people is necessary for China to continue to maintain healthy growth as the population ages.”

But there is a bigger worry for Beijing. Last week, the IMF boss, Kristalina Georgieva, warned that China’s consumption is falling short. “Rather than moving money into public investments, move it into the pockets of people, so there is more dynamism coming from a consumption boom,” she suggested.

For a long time, China has tried to build a consumption-driven economy. But economic data suggests China has yet to see a meaningful recovery in real household income growth since the first round of the pandemic in 2020, said Jinny Yan, chief China economist at ICBC Standard Bank. “This is now exacerbated by local lockdowns because physically people cannot go out to consume, and March retails sales data shows that even online sales have been hit hard by supply chain and logistical disruptions.”

There’s no easy way out of the current zero Covid policy dilemma, Yan said. This means that consumer confidence would be expected to continue to weaken even with monetary and fiscal support. Additionally, structural issues in the Chinese economy still linger.

“So there’s no silver bullet. Even if the current zero Covid policy would be eased, a high prevalence of Covid cases will still impact economic activity.”