Beijing’s ‘Zero-COVID’ Threatens China’s Economy

The Chinese Communist Party's insistence on a Dynamic Zero-COVID policy makes it difficult for China's economy to grow in 2022. Health workers are shown taking swabs for COVID-19 testing of residents of Huangpu District in Shanghai on March 21, 2022. Hector Retamal/AFP via Getty Images

News Analysis 

As the Omicron variant is causing a surge in COVID-19 infections across 30 provinces and municipalities in China, Beijing’s “zero-COVID” restrictions appear to be causing more harm than good.

The strict measures are sapping the productivity of businesses, weakening the stock market’s performance, forcing about 400 million people to remain in lockdown, and causing the economy to contract.

Data from China’s multiple indices suggest that the Zero-COVID policy has weakened first-quarter business results and the economy overall.

For example, the Caixin manufacturing purchasing managers’ index (PMI) dropped to 48.1 in March. A reading of under 50 indicates a contraction of China’s manufacturing sector as compared to the previous month. Stock performance, measured by the Shanghai CSI 300 Index and Shenzhen Composite Index, dropped 15 percent and 18 percent, respectively. These were the sharpest quarterly drops since the stock market crash of 2015.

Katherine Jiang, a Hong Kong financial analyst, told the Epoch Times that in 2020, the pandemic was harmful to businesses. Still, most remained optimistic that the virus would be contained and the economy would improve and recover. But this is no longer the case.

According to Jiang, the Chinese Communist Party’s (CCP) dynamic zero-COVID strategy has disrupted the current production rhythm causing businesses to become less optimistic than before. Company leaders are confused about how long the restrictions will last, and even if Beijing relaxes them at some point, they fear the CCP’s controls can be tightened again at anytime. The uncertainty that permeates China’s business climate is disruptive to confident production planning.

The head of an export firm in Guangdong, the epicenter of China’s manufacturing sector, recently told the Securities Times that while the pandemic had been disruptive to his firm’s production, business planning, materials supply, and transportation, the mandates to contain COVID have become equally disruptive to both businesses and customers.

Guangzhou is the capital of Guangdong Province. To get ahead of COVID’s spread in Guangzhou during the start of April, the city’s Epidemic Prevention and Control Department rushed to impose a zoning control. The department acknowledged that because its disease control experts had acted so swiftly, individuals and businesses did not have enough time to prepare.

By April 11, Guangzhou’s zoning control was unable to contain the virus and the affected area was growing. The restrictions established two types of zones to control people’s movements. A “lockdown zone,” where all stores/services are closed and residents are quarantined in their homes, and a “controlled zone” that allows people to go outside their homes, but closes restaurants and enclosed venues, and people must remain in their neighborhoods. Security guards are posted 24-hours a day at the gates of each residential neighborhood and outside residential buildings and businesses to ensure compliance with the zoning restrictions. Once entered, people can’t leave a zone.

A similar situation has occurred in Shanghai, as the zero-tolerance restrictions were more disappointing. The city, with a population of over 25 million and over 70,000 foreign companies, has been on lockdown for over 3 weeks, and the lifting of the lockdown is still not in sight despite food shortages and many neighborhoods not having any affected persons for over two weeks. Instead, the municipal government said it would step up enforcement of lockdown measures and adopt nine actions, starting on Friday, to achieve the goal of “no community spread,” a milestone that the city failed to achieve on April 20. The plan is to strictly implement the rules even though government data showed that the outbreak may have peaked.  According to the CCP’s Xinhua website, the cosmopolitan metropolis of Shanghai has entered the unprecedented status of “city-wide static management.”

A survey released on April 1 by Shanghai’s American Chamber of Commerce (AMCHAM) found that 99 percent of responding employers had been adversely affected by the widespread restrictions. Of these, 82 percent of U.S. manufacturers reported staffing shortages and deficits in raw materials that have slowed production.

On April 9, automaker NIO, headquartered in Shanghai, released a statement on its mobile app saying, “Since March, the company’s supply chain partners in Jilin, Shanghai, Jiangsu, and other locations have been shutting down production due to the epidemic and have not yet resumed. As a result, production of the entire line of NIO vehicles has been suspended.”

The aforementioned Jiang said: “The CCP’s strict control over the epidemic has greatly increased the uncertainty faced by enterprises in production. This applies in terms of workforce arrangement, raw material procurement, or even sales and transportation of goods, which can be disrupted at any time. The Caixin manufacturing PMI reported in March that falling into contraction range indicates a significant weakening of the manufacturing boom.”

Not only did the Caixin PMI for manufacturing fall into the contraction range (below 50 percent) in March, but the other PMI released by the CCP’s Bureau of Statistics had also dipped below the 50 percent threshold. In March, the manufacturing PMI, non-manufacturing business activity index, and composite PMI output index were 49.5 percent, 48.4 percent, and 48.8 percent, respectively, down 0.7 percent, 3.2 percent, and 2.4 percent from February. This suggests that China’s economy and overall level of prosperity have become weaker.

Chinese officials have also admitted that the epidemic and COVID restrictions have simultaneously affected the production and demand sides of China’s economy.

Consumption and Investment Confidence Weakened

The significance of the pandemic hardships in Shanghai cannot be taken lightly. This is China’s top city for consumer product sales, with revenues totaling $288 billion in 2021. The per capita average consumers spent in Shanghai that year was $7,824, compared to $3,856 across China.

In terms of Shanghai’s economic impact on China, it is ranked the tenth largest among all provinces and municipalities. Although Shanghai occupies only .06 percent of China’s land mass, its $690 GDP represents 3.8 percent of the total GDP.

On April 10, China News Network, the CCP’s official media outlet, acknowledged that COVID measures in Shanghai had curtailed people’s movement and spending habits. This has had a debilitating effect on the service, tourism, and restaurant industries.

Furthermore, the Shanghai Stock Exchange Index (000001:SH) has fallen precipitously since the start of 2022. The market opened on Jan. 4 at 3,649.15, then dropped 435.82 points and closed at 3,213.33 on April 12.

Jiang observed that “from the companies’ point sof view, consumer expectations directly affect the companies’ ability to operate, while investor expectations directly affect the companies’ ability to raise capital in the market.”

Moreover, she said, “the tightly-controlled zero-COVID policies not only affect demand but also undermine consumer and investor confidence and weaken their expectations. This can lead to consumers’ delaying purchases of non-essential goods and even divestment by investors. This is a big negative impact on business.”

Jiang warned, “If you look at it from a macro perspective, with weak expectations, the economy is not looking good for 2022.”

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.