Not all businesses have struggled through China’s zero-covid era. Andon Health, a Shenzhen-listed company that makes covid tests and medical devices, for example, posted a 32,000% increase in net profits in the third quarter of the year, compared with the same period in 2021, as it cranked out testing devices for China and America. The 35 largest companies producing covid-19 tests raked in some 150bn yuan ($ 21bn) in revenues in the first half of 2022, minting a new generation of pandemic tycoons.
But outside China’s covid-industrial complex, the economy is suffering. Lockdowns and onerous restrictions on movement have stunted consumer confidence and economic growth. Over the past fortnight they have inspired protests across the country, with tensions escalating over the weekend. Young people on the streets of Shanghai on November 27th rejected the prospect of endless testing and lockdowns, chanting: “We don’t want covid tests; we want freedom.”
The economic effects of China’s attempt to rid itself of the virus have never been clearer. The movement of people has been severely curtailed. During the week of November 14th, as covid cases rose, the number of domestic flights fell by 45% year on year. China’s three biggest airlines lost a combined 74bn yuan in the first nine months of 2022. Subway traffic in China’s ten largest cities was down by 32% year on year, according to Macquarie, an Australian investment bank. Box-office revenues, a gauge of people’s willingness to go out and about, tumbled by 64%. Only 42% of China’s cinemas were open on November 27th. Some of the largest cinemas have closed down altogether.
Lockdowns are now in place in cities accounting for about a quarter of China’s gdp, surpassing a previous peak of about a fifth in mid-April, when Shanghai was shuttered, according to an index compiled by Nomura, a Japanese investment bank. China’s youth unemployment rate hit a record high in July at 19.9%. A measure of road-freight throughput in the week to November 25th was 33% below its level the year before.
With covid infections hitting unprecedented highs, economic policymakers are attempting to gin up the economy. The central bank has announced a cut to lenders’ required reserve ratios. Technocrats have attempted to breathe new life and confidence into China’s property market, where sales have plummeted over the past year. Easing measures announced in mid-November have sought to help struggling developers gain access to credit, so that they can continue building. Sentiment is expected to improve a little in time. But continued lockdowns and dire consumer confidence will probably stop potential homebuyers making purchases. And the prospects for the economy as a whole in 2023 are looking increasingly gloomy.
Keeping out covid once looked like a good plan. As the rest of the world suffered from the seemingly unstoppable spread of new variants in 2021, China appeared to have largely returned to normal life. Its covid-related deaths are a tiny fraction of the covid-related deaths suffered in the rest of the world. But even as other places learnt to live with the virus in 2022, China’s covid policy, starting with the lockdown of Shanghai, the country’s main business hub, has appeared utterly disorganised and repressive. Citizens have been subjected to endless testing. Businesses and residential areas can be clamped down without warning. Travel between cities and provinces has become onerous, with each local government enforcing its own version of covid restrictions.
Rumours of reopening have swirled for weeks, sending Chinese stocks on a wild ride. The central government issued a list of 20 measures on November 11th meant to relax various covid restrictions, such as removing the need for secondary contacts to quarantine and reducing inbound travellers’ quarantine from seven to five days. The measures were received by stockmarkets as a sign that China was planning to phase out zero-covid. But China’s leadership did not intend to send such a signal. Instead the loosening was just a fine-tuning of the policy, aimed, probably, at making it more bearable for a longer period. And even then, the relaxations have been implemented in a hodge-podge manner. As case numbers have risen in many cities, local officials have reverted to broad, arbitrary lockdowns.
With pressure building on many fronts, leaders in Beijing must contend with the notion that they will eventually lose control of both the virus and public patience. The path forward is murky. Few analysts believe China is preparing for an imminent reopening. Instead many see a period of confusion and painful policy blunders immediately ahead. For at least the next four months, or until after an important political meeting in March, leaders in Beijing are expected to uphold zero-covid while also attempting to refine their methods. This situation could persist through much of 2023 if central government authorities fail to devise an exit strategy.
Under these conditions, the outlook for the economy is grim. The locking down of businesses, residential areas and even entire districts is likely to continue, although full-city shutdowns might be avoided. Local officials may also do this without formally announcing lockdowns, in an attempt to appear to be upholding the new loosening measures. This will only add to confusion. Many of the current troubles facing airlines and cinema companies will probably continue, and spread to other consumer-facing businesses.
Multinational companies can expect continued disruptions. And American consumers shopping for a new phone will also get a taste of zero-covid. A recent lockdown of a Chinese plant that assembles iPhones has caused severe disruptions for Apple. The factory, which employs 200,000 people and is owned by Foxconn, a Taiwanese company, suffered from an outbreak in October that forced a partial lockdown. Food became scarce. Rubbish piled up. By early November many employees made a run for it, hopping over walls and walking down motorways in an attempt to get home.
To resolve the labour shortages, officials in Henan province, where the factory is located, have called on low-level Communist Party functionaries to begin staffing production lines while Foxconn tries to recruit more workers. Production will probably still fall short.
There is also potential for an even more disorderly 2023, in which cases run wild and authorities are forced to abandon zero-covid. Many China-watchers have been enticed by the prospects of the end—whether planned or forced—of the policy. Some have envisioned the country transitioning from its current sclerotic state to business as usual, with minimal disruption between the two phases. This rosy outlook fails to account for what could become one of the world’s largest public-health upheavals in recent memory: a vast resurgence in cases across a population almost entirely new to the virus.
This period could include a pervasive slowdown in commercial activity. Both shopkeepers and shoppers may choose to shelter at home. Factories could temporarily stop running as infections sweep across production floors. Policy confusion and inconsistencies between counties, cities and provinces might snarl supply chains for weeks. Some local officials, who have been trained over the past three years to avoid covid cases at all costs, would probably rely on stealth lockdowns to curtail the spread. These conditions, if the transmission of the virus is allowed to take place fairly rapidly, could last for a quarter at a minimum. Ting Lu of Nomura says that the regions covered by lockdowns during this phase could account for as much as 40% of GDP, with output falling over one or two quarters.
Even if China were to end zero-covid immediately, the positive economic effects would probably not be felt until 2024, say analysts at Capital Economics, a consultancy. The interim period would be one of turbulence and instability. Growth would be low—and, depending on how local authorities carry out covid restrictions, protests may very well continue. ?
