Not all companies have had difficulties in China during the covid zero policy. Andon Health, a Shenzhen-listed company that makes covid tests and medical devices, for example, reported a 32,000% increase in net profit during the third quarter of the year compared to the same period in 2021, as it makes test devices for China and the United States. The 35 largest covid-19 testing companies had revenues of 150 billion yuan ($21 billion) in the first half of 2022, so the pandemic has created a new generation of tycoons.
However, beyond the covid-industrial complex, the Chinese economy is suffering. Lockdowns and severe restrictions on freedom of movement have slowed consumer confidence and economic growth. Over the past two weeks, these measures have given rise to protests across the country and tensions have increased over the weekend. On November 27, the young people of Shanghai took to the streets chanting “We don’t want Covid tests, we want freedom” to reject the prospect of lockdowns and endless controls.
economic effects
The economic effects of China’s attempt to get rid of the virus have never been more evident. The freedom of movement of people has been severely restricted. During the week of November 14, as infections increased, the number of domestic flights decreased by 45% compared to the previous year. The three largest airlines collectively lost 74 billion yuan in the first nine months of 2022. Metro traffic in China’s ten largest cities is down 32% year on year, according to Australian investment bank Macquarie. Box office receipts, an indicator of the population’s willingness to leave the house, fell by 64%. Only 42% of Chinese cinemas were open on November 27th. Some of the biggest cinemas have closed permanently.
According to an index compiled by Japanese investment bank Nomura, cities under lockdown now account for a quarter of China’s GDP, a percentage that surpasses the previous high of a fifth reached in mid-April when Shanghai was under lockdown. The youth unemployment rate in China hit a record 19.9% in July. According to one indicator, in the week before November 25, road freight traffic was 33% below the previous year’s level.
President Xi Jinping bowed
As covid infections reach unprecedented levels, policy makers are trying to energize the economy. The central bank has announced a reduction in the reserve ratios required of lenders. Technocrats have been trying to breathe life and confidence into China’s real estate market, whose sales have plummeted over the past year. The relief measures announced in mid-November have sought to ease access to credit for struggling developers so they can continue building. The environment should improve. However, ongoing lockdowns and consumers’ poor sense of security are likely to discourage potential homebuyers from buying. And the outlook for 2023 looks increasingly bleak for the economy as a whole.
At the time, keeping covid at bay seemed like a good plan. In 2021, while the rest of the world suffered from what seemed like an unstoppable spread of new variants, China seemed to have largely returned to normal life. Their covid-related deaths make up a small fraction of deaths in the rest of the world. Now, while throughout 2022 other places have learned to live with the virus, the Chinese policy against covid, starting with the confinement of Shanghai, the country’s main economic center, has given the impression that it was taking place in a completely disorganized and repressive. Citizens were subjected to endless trials. Commercial activities and residential areas may be closed without notice. Traveling between cities and provinces has become very difficult, with each local government applying its own version of the restrictions.
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Rumors of reopening have been circulating for weeks and make Chinese stocks appear to be riding a roller coaster. On November 11, the central government released a list of 20 measures aimed at easing various restrictions, such as lifting the quarantine obligation for secondary contacts and reducing the quarantine from seven to five days for travelers arriving in a country . Stock markets have welcomed the measures as a signal that the country intends to phase out its zero covid policy. However, the Chinese leadership did not intend to send that signal. The easing was just a political adjustment surely intended to make it more bearable for a longer period. However, the relaxations have been applied unevenly. And, as the number of cases has risen in many cities, local officials have once again imposed widespread and arbitrary lockdowns.
Pressure is mounting on many fronts, and Beijing’s leadership is faced with the idea that it will eventually lose control over the virus and the people’s patience. The path they have to follow is confusing. Few analysts believe China is preparing for an imminent reopening. Instead, many envision an immediate future marked by a period of chaos and painful political missteps. For at least the next four months, or until a major policy meeting is held in March, Beijing’s leaders are expected to maintain zero covid measures as they seek to refine them. This situation could continue well into 2023 if central government authorities fail to develop an exit strategy.
gloomy prospects
Under these conditions, the outlook for the economy is bleak. Closures of businesses, residential areas and even entire neighborhoods are likely to continue, although a total lockdown of a city could be avoided. It is also possible that local officials will impose lockdowns without formally announcing them in an attempt to give the impression that they are supporting the new easing measures. All of this will only add to the confusion. Many of the current problems for airlines and movie theaters are likely to persist and spill over into other consumer-facing businesses.
Multinationals can count on continuous interruptions. And US consumers buying a new phone will also suffer from the zero covid policy. The recent shutdown at a Chinese plant that assembles iPhones has caused major disruption for Apple. The factory, which employs 200,000 workers and is owned by Taiwanese firm Foxconn, suffered an outbreak in October that forced a partial lockdown. Food began to run short. The trash accumulated. In early November, many employees decided to flee, climbing over the fences that surrounded them and walking along the highways with the intention of returning to their homes.
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To address the labor shortage, officials in Henan province, where the factory is located, have staffed production lines using low-level Communist Party officials as Foxconn looks to hire more workers. Production is likely to remain insufficient.
An even more chaotic 2023 cannot be ruled out in which infections are rampant and the authorities are forced to abandon the zero covid policy. Many observers are seduced by the prospects of a (planned or forced) end to that policy. Some have come to imagine that the country will transition from its current fossilized state to business as usual with minimal disruption between the two phases. That optimistic view ignores what could become one of the biggest public health turmoils of recent times in the world: a large outbreak of cases in a population that has barely known the virus.
Reduced commercial activity
This period may include a general reduction in business activity. Both traders and buyers could decide to take shelter at home. Factories will temporarily stop working if infections spread through manufacturing plants. Political confusion and inconsistencies between counties, cities and provinces will cripple supply chains for weeks. Some local officials, trained over the past three years to avoid Covid cases at all costs, are likely to resort to covert lockdowns to slow the spread. Such conditions, if virus transmission occurs fast enough, could last at least a quarter. Nomura’s Ting Lu says that at that stage, regions with lockdowns could account for up to 40% of GDP, with output down by a quarter or two.
Even if China were to end its zero-covid policy immediately, the positive economic effects are not likely to be felt until 2024, say analysts at consultancy firm Capital Economics. The intervening period would be a time of turbulence and instability. Growth would be low, and depending on how restrictions are enforced by local authorities, protests could continue.
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Translation: John Gabriel López Guix
