I received an email from a friend in Beijing earlier this week, about how his days are
consumed with finding nonperishable food in preparation for a possible lockdown.
He signed off the email with the line “we are undergoing an unbelievable time in Chinese
history”.
My friend told me of the three daily covid tests required and that certain neighborhoods
in Beijing were already in lockdown.
Beijing has since stepped-up coronavirus restrictions after reporting 41 cases on Sunday.
The new wave of controls is the latest sign that China’s leadership is committed to
their heavy handed zero-Covid policy.
This despite indications that the policy is causing huge economic damage both within the
country and internationally.
In late March of this year, Shanghai - the richest city in the world’s second-largest
economy – went into what was supposed to be a temporary lockdown.
By early April, 28 million people, were confined to their homes and Shanghai was effectively
closed for business.
The Orwellian images were difficult to ignore.
Robots patrolling the city, with loudspeakers blaring directives for covid tests throughout
the day.
At night, people were taking to their balconies to shout in protest at the lack of essential
supplies.
Drones flew through the city blaring messages like “Please comply with COVID restrictions,”
and “Control your soul’s desire for freedom”.
As the rest of the world is emerging from the pandemic two years after its onset, it
is surprising to see what is happening in China.
Economists are warning that the economic shock from these lockdowns could be more severe
than shock that came in the aftermath of the Wuhan outbreak two years ago.
This is because of Shanghai’s importance in global trade and manufacturing.
If three months ago, someone told you that within weeks the citizens of Shanghai would
be running around looking for food on a daily basis, you would probably not have believed
them.
If this can happen in a city as wealthy, cosmopolitan and economically important as Shanghai, what
does it tell us about the overall situation in China.
This is both a humanitarian crisis and an economic crisis.
The rising pressures are already eroding confidence in Beijing’s ambitions of reaching growth
of 5.5 per cent this year — its lowest target in 30 years.
The investment bank Nomura estimates that 344 million people, or a quarter of the country’s
population, are currently under some kind of lockdown restrictions.
Chinese authorities have limited movement within the country to reduce the spread of
the virus, meaning that vital logistics routes that connect buyers and suppliers within the
country are no longer functioning, leaving factories without crucial components for manufacturing.
Farmers in the Northeast China Plain - one of the major grain-producing areas of China
are cooped up during what is normally the spring planting season; and many factories,
shops and restaurants across the country have been forced to suspend their operations.
Reduced grain production in China when combined with slashed production in Ukraine is very
worrying to say the least.
The IMF has cut its GDP growth forecast for China to 4.4 per cent for the full year from
the 8.1 per cent they had predicted last year.
On top of this, nationwide consumption in China fell 3.5 percent in March, while spending
on restaurants plummeted 16 percent, according to official data suggesting that anti-Covid
controls are slowing an economy already suffering from real estate market problems.
The zero-COVID policy has taken a great toll on the lives and finances of regular Chinese
citizens.
More than 4.5 million small businesses closed in 2020 and even more are estimated to have
closed in 2021.
As Chinese citizens deal with their third year of Covid, many have drained their savings
to a point where they need to curtail their spending.
The governments solution of weakening the currency to help manufacturers, also raises
the cost of living for Chinese citizens, weakening domestic consumption — something China need
more of, not less, if it is to grow sustainably.
Due to the global nature of trade, the severe disruptions happening in China can be expected
to have a global impact and continue through the rest of the year as backlogged cargo vessels
start sailing again.
China accounts for about 12% of global trade and Covid restrictions have idled factories
and warehouses, slowed truck deliveries and exacerbated container logjams.
The lockdowns present another challenge for global supply chains that have been stressed
by both pandemic shutdowns and the war in Ukraine.
This has led to greater competition for available goods pushing up prices which has been fueling
inflation worldwide.
While there has been a lot of talk of the need to hike interest rates to combat inflation,
an increase in interest rates will do nothing to combat inflation that is caused by these
trade disruptions.
Ok, so, what is going wrong in China?
Well, at the center of the problem is the fact that the Omicron variant of Covid-19
is much more transmissible than the prior variants were, and Sinovac – China’s homegrown
vaccine doesn’t appear to protect very well against it.
Sinovac appears to be less effective at preventing death from Covid among the elderly than the
internationally developed mRNA vaccines, particularly for people who received less than three shots.
The early success of Chinas zero Covid strategy ensured that deaths in the country were in
the low thousands, compared to more than a million deaths in the United States, which
was a genuine triumph, but this success possibly created a false sense of security in China
and today, more than 130 million people in China aged 60 and above are either unvaccinated
or have had less than the necessary three doses, which, according to a University of
Hong Kong study, puts them in much greater danger of developing severe Covid symptoms
or dying if they contract the virus.
So, while Omicron appears to be less fatal in the rest of the world, that might not be
the case in China and Chinese officials are terrified that if they open up like the rest
of the world has, millions of citizens could die.
National pride has also prevented China from approving foreign mRNA vaccines for use among
its people, leaving them to take the less effective vaccines developed by domestic companies.
Beijing has been urging the development of homegrown mRNA vaccines — two of which have
now entered clinical trials.
The stakes right now are very high for President Xi, who aims to take an unprecedented third
term as head of the CCP later this year.
His carefully cultivated image as a strong and competent leader could be badly tarnished
if the government loses control of Covid — or blunders into an economic crisis while trying
to contain it.
Right now, Beijing has a stark choice to either start a mass vaccination programme using foreign
mRNA vaccines or sustain the ruinous economic and social costs of continued lockdowns.
At the moment it looks like they are doubling down on the strategy which used to work, but
no longer appears to.
While some western governments possibly mishandled their initial response to Covid-19 through
a lassiez faire approach, Xi and the Communist party suffer from the opposite problem.
Because extreme government control worked initially, their instinct is to respond to
the spread of Omicron by more extreme lockdowns when dealing with this more contagious variant.
The Chinese government does not get to claim legitimacy through the results of elections,
instead government officials in China argue that the Communist party draws its legitimacy
from its performance.
The claim is that the Chinese government has outperformed western governments because of
the superiority of their socialist system with Chinese characteristics.
President Xi himself made this argument at a ceremony in 2020, claiming that the success
of Chinas zero covid policy, proves the superiority of the Chinese style of government.
The extreme lockdowns we are seeing reflects a government dogmatically committed to its
“zero Covid” policy — of preventing any community spread of the coronavirus — even
as the contagiousness of the omicron variant renders such a policy basically unworkable.
So, why are they doing this?
Well, if you had looked at the Chinese approach, going back to Wuhan in early 2020, six months
ago, and even more recently, you would’ve said that “this worked for China.”
The country had the surveillance tools in place to keep track of people and to enforce
contact tracing and lockdowns in ways that wouldn’t be accepted by society in other
parts of the world.
The problem with this approach is that it downplayed the need to vaccinate vulnerable
populations, especially the elderly.
And national pride meant that the government would rather get by using a homegrown vaccine
that underperformed rather than lose face by importing a foreign drug.
Once they were far enough down this track it became difficult to switch direction and
move to a living-with-Covid type of strategy that you see elsewhere in the world, because
you have this vast vulnerable population who have not been vaccinated at all in many cases.
Now, while these extended lockdowns are doing great damage to the Chinese economy, the economic
harm is much more global.
Apple, Coca-Cola, General Electric and Pernod Ricard are amongst the biggest companies to
have warned this week of the threat from the spreading lockdowns in China, with many more
blaming the strict measures for higher costs, shortfalls in their latest results and their
more cautious outlooks.
Companies from Amazon to Archer Daniels Midland have noted that obtaining goods from China
by ship or air freight now costs significantly more and takes longer due to restrictions
at Chinese ports and disruptions to internal train and trucking logistics within the country.
Wait times for vessels arriving in Shanghai to dock in port have shot up from 12 hours
to two days since the start of the city’s lockdown.
The economic damage comes right as the global economy is dealing with the consequences of
Russia’s invasion of Ukraine, which has sent energy prices soaring, made certain industrial
commodities less available and prompted the IMF this month to cut its global growth forecasts.
Multinational firms are dealing not just with strains on supply chains but additionally
with a slowdown in demand within China.
Now, the Chinese government has made efforts to keep the economy going.
In Shanghai, the local authorities have selected certain companies in key industries such as
automobiles and semiconductor manufacturing to restart production, but the vast majority
of businesses still remain closed.
Chinese authorities have been trying to keep factories and ports operating by keeping workers
on the premises in so-called closed-loop systems.
Some factories in Shanghai, such as Tesla and some of its suppliers, have resumed production.
But they have to follow complicated and expensive rules, including instituting a system where
workers live on-site and are tested regularly for the virus.
Not many companies are able to do this as they lack the capacity to provide accommodation
for all of their employees on site.
Rules like this are especially difficult for smaller businesses which could fold causing
job losses leaving former employees unable to pay their mortgages.
This could exacerbate the problems being seen in the real estate market in China.
In the short run, the logjams will mean more problems for global merchandise trade, which
slumped in 2020 and rebounded last year.
Longer term, we might see bigger changes in the global economy which has grown more and
more interconnected in recent decades due to increases in international trade.
For some corporate executives, moving production closer to home, is no longer a patriotic political
slogan — it’s become a business necessity given all the uncertainty.
Key policy makers are coming around to the idea that a sea change in the developed world’s
supply lines might be necessary.
U.S. Treasury Secretary Janet Yellen calls her idea for more resilient trade linkages
“friend-shoring” — a not-so subtle jab at China and Russia.
Whether this shift can happen or not, depends largely on whether the pandemic has convinced
consumers to accept higher prices for products made closer to home.
According to a report from the consulting firm Kearney, 78% of CEOs are either considering
reshoring or have already done so.
The report argues that while globalization will never die, it may evolve to a different
form.
Companies have weathered the roughest bouts of supply turmoil over the past year partially
by raising prices — and consumers have largely accepted this.
Tesla lost about a month of work during the Shanghai shutdown.
Bed Bath & Beyond earlier this month announced that an “abnormally high” level of inventory
was in transit, unavailable or held at ports through the early part of this quarter.
Alcoa, the aluminum manufacturer, last week blamed transport problems for higher inventories.
Continental, Europe’s second-largest maker of auto parts, lowered its growth forecast
for global production of passenger cars and light commercial vehicles to a range of 4%
to 6%, from the previous forecast of 6% to 9%.
Volkswagen, the world’s second-largest electric vehicle manufacturer, announced yesterday
that they have “sold out” of battery-powered vehicles in the US and Europe for this year
as persistent supply chain bottlenecks hit global production.
The head of the Shenzhen Cross-Border E-Commerce Association, an organization representing
some 3,000 Chinese exporters, told the press last week that even though a lockdown in Shenzhen
lasted only a week, “many sellers are suffering about a one-month delivery delay” due to
the logistics problems that the lockdown caused.
Christine Lagarde, The President of the ECB, in a speech last week, said that Europe’s
integration into global value chains was even deeper than the U.S.’s.
She pointed out that trade as a share of the euro area’s GDP rose to 54% in 2019 from
31% twenty years ago, compared with America’s 3 percentage-point rise to 26%.
She cited a recent survey that found 46% of German companies get significant inputs from
China.
Of those, almost half are planning to reduce that dependency.
Russia’s invasion additionally means the search for the lowest-cost suppliers must
be refocused around geopolitical alliances.
“We must work towards making trade safer in these unpredictable times, while also leveraging
our regional strength,” according to Lagarde.
“Even industries that are not considered strategic are likely to anticipate the fracturing
of the global trading order and adjust production themselves.”
President Xi, speaking at a meeting of the Central Committee for Financial and Economic
Affairs, called for efforts to boost infrastructure investment last week.
Implying that the Chinese government will continue to lean on their favorite stimulus
tool, rather than capitulating on zero-Covid or the property sector crackdown.
China can’t lock down, hit its growth target, and stop buying growth with debt all at the
same time.
Confronted with China’s worst economic conditions and outlook since at least the start of the
pandemic, policymakers have so far presented only modest easing measures.
Possibly because stimulus measures would have rather limited effectiveness, especially in
regions brought to a standstill due to Covid lockdowns.
It will be interesting to see if they continue on in this direction or change strategy soon.
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Have a great day and talk to you again soon, bye.