On May 11, 2021, Taiwan shut down schools, gyms, bars, and most public facilities.
Their first COVID soft lockdown.
Restaurants stayed open, but can only do takeout or delivery. You can still go
outside but there was little to do. Most people stayed at home and waited for it to blow over.
Taiwan has recently ended their zero-COVID policy. But China is sticking with theirs.
This means the ample use of lockdowns to isolate clusters - a treatment with wide-ranging economic
consequences. Most prominently, they locked down the 25 million people of Shanghai.
Hong Kong and Shenzhen have also recently went through their own lockdowns as well.
A lockdown is a drastic intervention with wide ranging economic damage. But is that
damage permanent? In this video, I want to look at what a lockdown does to an economy.
## A Note
I want to say this first. The goal of this video
is to largely examine the economic damage that a lockdown deals to an
area. Sort of like an overview of the side effects printed on a medicine bottle label.
I am not saying that we shouldn’t ever do a lockdown. I am not denying that COVID isn't
dangerous and that we might need to "bend the curve". Governments lock down to try
to save lives and in my experience lockdowns have largely done that.
I am also not advocating that we should "sacrifice
lives for the sake of the economy" - a term that I find inflammatory.
Millions in America, UK, India, China, Europe, etc have died and that is an unspeakable tragedy.
I am not ignoring all of these issues. I acknowledge them.
But that’s not what this video is about.
## A Lockdown
The government in Wuhan, China implemented the first COVID-19 lockdown on January 23,
2020. The city's urban bus, subway, ferry, and passenger transportation links
were halted and exit routes were closed.
Other cities in the Hubei province soon followed. The government extended the Spring
Festival holiday that traditionally happens around that time. While those other areas soon
lifted their own lockdowns after a short time, the lockdown in Wuhan lasted until April 8th. 76 days.
Two months later, the United States and other countries around the world followed similar
guidelines. They restricted outdoors socializing and shut down "non-essential" businesses.
Implementation, of course, varied from country to country. Some countries went harder and longer
than others. But the lockdowns finally started to lift with the rollout of COVID vaccines,
which work and you should take them.
By 2021, the United States and the rest of the world
had largely stopped using lockdowns as a way to control rising COVID infections.
New Zealand did a few regional lockdowns for the Auckland region in 2021.
Singapore had some socializing restrictions and of course there were the ones in Taiwan.
As of 2022, however, the number of countries still resorting to lockdowns is dwindling,
with China the major single outlier.
## Affected Industries
The soft lockdown in Taiwan lasted for a few months from mid-May to mid-August 2021.
While the second quarter of 2021 saw a slight dip, 2021 on the whole was a very good for GDP.
For 2021, Taiwan posted a 6.28% GDP growth rate, the largest in 11 years.
However, much of that growth comes from immense export growth
in semiconductors and other electronics that Taiwan specializes in.
These flagship companies are important, but they do not represent the whole economy.
Certain industries did very well. Food and grocery stores as well as health
stores experienced massive increases of sales as consumers start eating at home
and panic bought things like toilet paper. Video gaming and technology also surged.
But leisure, in-person entertainment, travel and restaurants on the other hand
saw substantial downturns. Restaurant revenue is especially dependent on foot traffic
and they took it really bad on the chin.
In March 2020, full revenues for restaurants in the United States declined around 70%.
The numbers for April 2020 were nearly 50% lower than what they were in 2019.
## Small and Medium Businesses
In China, there are over 40 million registered SMEs or Small and Medium Enterprises.
They make up 99% of total businesses and 80% of total employment. And they contribute a
substantial portion of government tax revenue - 57% in the case of Wuhan.
Many of these SMEs operate in the service sector, which tends to require an in-person component.
And because SMEs lack the same options as large businesses, they tend to have
working capital issues and cannot afford to be closed for long periods of time.
COVID also disrupts supply chains. So even if a company is classified as essential and can
stay open, they rely on other companies for the components to offer their goods.
Without anything to sell, they are basically up a creek.
A 2021 OECD analysis of debts and insolvency found that the first round of 2020 lockdowns
caused profits to decline by 40-50% across the board, but again dependent on industry.
About 30% of those companies will experience losses. And so, cannot service their debts.
It roughly doubles the number of "distressed firms"
as there would be normally. This seems to imply a massive wave of SME closures coming up ahead.
## Wuhan
Surveys done in February 2020 found that 80% of Chinese SMEs saw some
loss of operating income during the lockdown. Nearly half of them saw
tighter cash flow issue and higher operating costs.
Closures did happen. Public tracking records seen by the Hong Kong newspaper SCMP
showed that nearly 4.4 million small businesses de-registered across the nation.
This would be twice as high as the 2019 number and 10x the 2018 number.
Surveys within Wuhan found that 18% of SMEs
ended up closing due to the pandemic. Many of these companies employ rural workers,
so the unemployment burden for these closures fall heavily on the rural workforce.
Another 2021 survey across 726 villages in 3 provinces
found that nearly 75% of rural villagers outside of Hubei lost their jobs because of COVID layoffs.
A third of them were still unemployed into April 2020 - near the end of the Wuhan lockdown.
## The Bankruptcy Wave?
At the time, media sources braced for a wave of bankruptcies in their countries.
In some cases that did happen. But in certain other countries,
the bankruptcy rate actually fell in 2020 as compared to 2019.
In France, the first lockdown lasted from March 17 to May 10, 2020. French business
bankruptcies decreased by 60% compared to the previous month, way higher than the average.
In the United Kingdom, the number of compulsory liquidations decreased 80% in May 2020
from the pre-lockdown period of March 2020. And insolvencies decreased by 30% year over year.
Voluntary liquidations rebounded in 2022, but you might be able to chalk that up to the processing
delays. The amount of compulsory liquidations rose too, but remain below the pre-pandemic era.
Over in the United States, the American Bankruptcy Institute confirms a 25%
decrease in business filings in the April to June 2020 period.
The 2021 period saw this trend continue as well. Total American bankruptcies decreased
24% from 2020. In fact, 2021 saw the lowest number of bankruptcy registrations since 1985.
## Interventions
The reasons for this extended decline are obvious. First, COVID health restrictions delayed
bankruptcy processing as government workers stayed home or transitioned to new forms of work.
And second, those Western governments intervened massively,
injecting billions of dollars of liquidity to keep people employed.
Not all countries can afford or are in the position to fund something as lavish as the
$2.2 trillion CARES Act. But the results I argue make the measure worth at least considering.
However the Chinese national government opted towards a more conservative position - cutting
fees and taxes to individuals while offering new loans to what they call the “real” economy.
Per a 2021 speech given by the Chairman of the China Banking and Insurance Regulatory Commission,
China in 2020 extended $3 trillion of loans,
cut $375 billion of taxes and fees, and lowered interest rates and loan charges.
China cites their 2020 growth rate and the quick rebound in GDP
in the two quarters after the Wuhan lockdown as proof positive that this policy mix works
as compared to what was done over in the West.
## Rapid Recovery
As the Chinese government said, Wuhan's overall economic production did recover relatively quickly
in the immediate wake of its 70+ day lockdown despite the SME closures.
A temporary lockdown does not change the fundamental structure of the economy.
So with a little government help to resume key production items and so on,
companies can quickly get back on their feet in the short term.
Employment as a whole reached an average of 87% of the pre-shock level. By September 2020,
industrial output had basically recovered to as normal. This is a healthy sign.
Chinese studies done shortly after the Hubei lockdowns have repeatedly found that while
the economic damage done during the lockdowns were massive, they have also been temporary.
So the Chinese government can and will point to these numbers
as validation. And in some ways, the story is quite correct.
But it also seems to be true that output is not the same as employment/openings.
And that lasting damage was inflicted and many Chinese SMEs did close their doors.
Furthermore, government intervention did not reach those who most needed it - the rural poor.
The aforementioned 2021 village survey found that
just 20% of villagers received any form of government relief.
Remember, 74% of this population lost their jobs. 31% still had no job deep into April,
forcing them to cut back spending on food and daily necessities.
That’s not good and something to improve on in the future.
## Demand Concerns
The question is what happens over the medium or longer term.
Japan, for instance, passed a big stimulus voucher package.
All in all, the government spent nearly $500 billion on economic stimulus - tax relief,
$1000 voucher handouts, and loans to certain companies.
Despite this support, in 2020 an estimated 53,000 Japanese businesses left the market.
Most of them were service businesses and construction firms.
This surge in closures was tied to a drop in consumer demand rather than insufficient
cash flow. If business owners see their prospects deteriorating up ahead then they are not going to
stick around for the finale. They'd rather just close and move onto something else.
Wuhan saw some of this in the year after the lockdown.
A followup survey performed on SMEs found that agricultural business owners' biggest concerns
had shifted from fulfilling supply and meeting immediate cashflow needs to the demand side.
Export manufacturing firms have similar concerns. COVID lockdowns around the world
turbocharged exports of home-based goods like electronics, furniture,
and the like. Companies bulked up to meet demand, and Chinese exports surged to brand new heights.
But times are now changing. Macroeconomic concerns,
monetary tightening, and declines in asset values like stocks and crypto
are threatening to rollback those pandemic gains. This sort of demand decline is a
very real concern - and if it occurs signals some form of medium-term fundamental decline.
America and the United Kingdom managed to avoid this cliff. As I mentioned before,
2021 saw just as few insolvencies and bankruptcies as 2020.
Which one can argue is because of the massive government interventions - albeit with its
own set of consequences. But China has and probably will not take those same measures.
## Other Differences
One other thing that I should point out here is that Wuhan and Hubei are nothing like Shanghai,
Shenzhen, and the Pearl River Delta.
Hubei exports a few things en masse. They produce a great deal of telephones,
garments/textiles, and a few electronics. But Hubei's biggest export is its people.
Companies in other provinces hire Hubei workers to staff their ranks.
Kinda like how in the Silicon Valley, I felt like everyone from out of state
came from Chicago. But I digress.
So when Wuhan and Hubei shut down, the primary economic shock that other companies experienced
was that their workers came back late from the long holiday.
In the wake of the lockdown, 30% of companies had a re-staff rate of under 70%.
Nearly 40% of companies cited this as the number one reason why they could not resume work.
Shanghai and the Pearl River Delta are not the same as Hubei.
It is the country's technological and financial engine. Their biggest chipmaker - SMIC - is
located there. And the Pearl River Delta is full of high-tech companies like DJI and CATL
that feature prominently in our delicate global supply chain.
You can easily put a food shop under hibernation. That is not so the case
with a sophisticated semiconductor fab. But at the same time, these technology companies tend
to be more resilient to the economic damage from a lockdown. So let’s see.
## Zero COVID
The Communist Party of China seems to be hardening its stance on debate with
regards to the Zero Covid Policy. Per a recent political briefing:
> It is necessary to have a profound, complete and comprehensive understanding
of the guidelines and policies ... and resolutely fight against all words and deeds that distort,
doubt and deny China's anti-epidemic policies.
The current lockdown in Shanghai has attracted a lot of attention
in the world news. And there has been a great deal
of external criticism - especially from foreigners - of the Zero-COVID policy.
It might be tempting to think that the Chinese government is being bull-headed.
Yet there are also reasons to believe that the Party has the people's backing.
Bear with me here. Throughout 2021, a policy think tank in Singapore ran polls in Singapore.
Among other things, the polls found that less than half of the population as a whole felt
positive about the notion that Coronavirus might become endemic within the population.
The younger and richer people can get relatively more comfortable with the
notion - might even get enthusiastic about it - but the elders and less affluent not so much.
Furthermore, with regards to opening up, the polls found that while the Singaporean population might
be able to accept higher levels of infections, they cannot accept high numbers of deaths.
The Singaporean ruling party came to believe - correctly - that
COVID death numbers are correlated with their public approval rating.
Considering the recent experience in Hong Kong,
it’s very easy to see the death rates in China rocketing to unacceptably high numbers
based on vaccination status and the sheer scale of the elderly population.
## Taiwan
I personally felt a lot of the same sentiments here in Taiwan throughout 2020 and 2021.
People felt safe here and had a hard time accepting that COVID can be
allowed to spread through the population - possibly killing their family and friends.
Taiwan managed to stop COVID twice. That first very serious surge in May 2021 - which had mostly
been Delta - which it finally broke with that soft lockdown. And then it stopped another Omicron
outbreak in January 2022 without a lockdown - which I still consider a gosh darn miracle.
But then Omicron fueled a second case surge
in March 2022 - and the Taiwanese government realized four things.
One, Taiwan had been largely vaccinated and boosted with Western MRNA vaccines - though
the elders still have to get their shots. Get your shots, elders!
Two, Omicron itself seems to be rather mild - the
COVID wards aren't as chaotic as they had been last year.
Three, it took months for the local economy to recover from the soft lockdown. Take this
with a grain of salt - because I couldn’t find reputable data - but my personal experience was
that one out of every six or seven local shops closed down for good. Not brand name stores,
but small mom and pops. The situation was far worse in cities like Kaohsiung and Tainan.
And four, the rest of the world was opening up. Even as recently as February 2022,
over a hundred new COVID patients were being found in quarantine each day.
The Omicron waves will only continue, and eventually one of those is going to break through.
## Conclusion
We know that lockdowns work in stemming rising numbers of infections.
And that people want to eat, shop, and live in a disease-free environment.
At the same time, the data seems to show that Chinese businesses can rapidly rebound from
their external hibernation, with some government help. But not all of them.
So all in all, the evidence seems to say that if the virus can be restrained,
then the economic effects from these assorted lockdowns will be temporary.
But that "if" is a big one, the nail that holds everything else down.
A challenge that gets progressively harder as the rest of the world opens up.