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.

If you found this video interesting, you should watch this one next.

Have a great day and talk to you again soon, bye.