The damage of the ‘Covid zero’ policy for China’s economy

The rigid lockdowns of the ‘covid zero’ policy have dealt a heavy blow to the Chinese economy – and the effects are increasingly evident.

The youth unemployment rate reached a record 20%, corporate profits declined and the manufacturing sector contracted again in November.

For a country accustomed to having annual growth rates close to 9% in recent decades, the situation is getting complicated.

International forecasts estimate that economic growth for this year will not exceed 3%, well below government expectations.

If this continues, the Chinese economy will register its slowest expansion in more than four decades, except for the 2020 crisis at the height of the pandemic.

Although on Thursday (1st) the Chinese government announced that it will ease some of the restrictions imposed by the zero Covid policy, it is still not clear what the new measures will be – at a time when infections caused by the omicron variant among the population, which has not been vaccinated en masse.

Fed up with lockdowns, hundreds of people have staged unprecedented protests in recent days, sparked by a fire that killed ten people in a residential building.

Protesters attributed the deaths to the fact that the doors of the building were blocked to prevent contagion of the virus, something that the authorities deny.

“We don’t want Covid tests, we want freedom”, shouted a group of young people in the streets of Shanghai during a demonstration in which shouts were also heard against the government of President Xi Jinping, something unprecedented in the Asian country.

While restrictions on free movement have lowered consumer confidence —even arousing the ire of those who are subjected to long confinements—, the government faces the dilemma of shifting its focus from health to stimulating the economy, risking infections getting out of control.

‘A tremendous damage to the economy’

“Covid zero is causing tremendous damage to the Chinese economy,” says Nancy Qian, professor of economics at the Kellogg Business School at Northwestern University, in the US, to BBC News Mundo, the BBC’s Spanish-language news service.

Lockdowns have caused major disruptions to product supply chains around the world. And inside the country the effects have been very hard for the population.

During the Shanghai lockdown, notes Qian, food shipments for residents confined to the city “rotted in the streets while citizens starved”.

Month-long large-scale lockdowns in a city like Beijing or Shanghai, explains the researcher, reduce economic growth by at least 4%.

“If you add up all the lockdowns that have happened, the negative impact is huge.”

Any weakening of the world’s second-largest economy has global ramifications, even more so when organizations such as the IMF (International Monetary Fund) estimate that around a third of countries will enter a recession in 2023.

How the iPhone Became a Symbol of Despair

Investors and markets are uneasy about the rise in infections, given that China has not had a mass vaccination campaign, which further increases levels of uncertainty about the economic future.

On the other hand, “people inside the country are spending less money on things like cars and smartphones”, another sign of the impact that the Covid-zero policy has had, says journalist Suranjana Tewari, the BBC’s economics correspondent in Asia.

Against the backdrop, she adds, is the fact that “China is facing a number of challenges, including the housing crisis, crackdowns on tech companies and the effects of lower demand as a result of the global slowdown.”

Multinational companies such as Apple are seeing the effects of the zero covid policy on their production lines.

The recent closure of a Chinese factory that assembles iPhones has caused trouble for the tech giant. The factory, which employs 200,000 people and belongs to Foxconn, a company of Taiwanese origin, suffered a covid outbreak in October that forced its partial closure.

When there was a shortage of food, many employees who had been confined fled the factory, jumping over walls and walking along highways in an attempt to get home. An act of desperation that had an impact on the manufacture of a mass consumer product in the world.

While the severity of the lockdowns could change in coming weeks, until now they were still in effect in cities that account for about a quarter of China’s gross domestic product (GDP), according to an index compiled by Nomura, a Japanese investment bank.

‘It could get worse before it gets better’

The Covid-zero policy has been a major hurdle for the Chinese economy in recent months, argues Mark Williams, chief Asia economist at consultancy Capital Economics.

It forced cities to implement lockdowns and made everyone afraid to go out for fear of being quarantined, he told BBC News Mundo.

More than 2 million people stayed in quarantine facilities.

“It’s possible it will get worse before it gets better,” he warns.

“The authorities will not want to relax the Covid-zero policy until the vulnerable are well vaccinated, and that will take months.”

Reopening a country takes time. Even if China decided to end the Covid-zero policy now, the positive economic effects would likely start to be felt around 2024, according to some analysts.

But it all depends on the reopening plan defined by the Chinese authorities and how quickly it will be implemented.

‘No doubt there will be an opening’

Some economists are confident that sooner or later there will be a change in policy.

“The opening will be slow, probably with a few steps backwards, but without a doubt there will be an opening”, Alicia García-Herrero, chief economist for Asia-Pacific at investment bank Natixis, told BBC News Mundo.

“China is trying to change the zero covid policy to the Hong Kong model, in the sense of making lockdowns very fast”, he adds.

🇧🇷[Mas] clearly investment and consumption are not going to come back quickly because people are very worried.”

While reopening will be a long and difficult process, says García-Herrero, “the economy will be better next year” anyway.

This text was originally published here.