Why China’s zero-Covid policy hurts 

Paran Balakrishnan | Updated on: Apr 26, 2022
China is battling its worst Covid-19 caseload since the pandemic erupted

China is battling its worst Covid-19 caseload since the pandemic erupted | Photo Credit: Kevin Frayer

The lockdown measures have hammered domestic production and choked global supply chains further

It’s the factory of the world. But with China in shutdown mode, what will be the knock-on impact on industries around the globe? That’s the worry of everyone from automobile and drone-makers to laptop and fertiliser manufacturers. Anyone with doubts about how much the world’s industries need China, just look at how India’s imports from the Middle Kingdom keep rising even though our Government’s been trying to make its economic boycott work ever since the Ladakh stand-off.

Swathes of Shanghai, China’s financial capital, have already been under a ruthlessly tight lockdown for weeks, aggravating supply-chain disruptions globally. And now it looks like Beijing may be headed in the same direction. What’s more, the Government isn’t likely ease its lockdown strategy because it’s determined to prove its “dynamic zero Covid” policy’ is still a winner and superior to how the rest of the world’s managed the pandemic. 

A clue to how badly lockdown measures have hammered Shanghai’s production came in data showing industrial output shrank 7.5 per cent last month year-on-year. Chinese demand for gasoline, diesel and aviation fuel in April is expected to shrink 20 per cent from a year earlier, according to Bloomberg.

The international fallout from China’s shutdowns can be seen in the Brent crude price which peaked at $127-a-barrel amid worries about effects of Western sanctions on Russia over the Ukraine war. Analysts had speculated the price might hit an unprecedented $200. Instead, it sank Monday to $102.49. The key factor behind the oil price fall are fears China won’t be able to control Covid-19 and that shutdowns will gum up factory output and create massive logistics logjams globally.

China, battling its worst Covid-19 caseload since the pandemic erupted, is trying to beat Omicron with its typical super-efficiency. A few weeks ago, it created a new global record by testing 25 million people in Shanghai in one day. Now, it’s planning a repeat performance by testing 21 million Beijing residents in 48-to-72 hours for what the government calls the “complex and stealthy” virus. “Fighting with speed” is key to control, asserted the Global Times.

But the cost’s high. The IMF’ downgraded China’s growth forecast twice this year with its latest 2022 projection at 4.4 per cent (India is seen growing by 8.2 per cent). It has slashed its 2022 global growth forecast to 3.6 per cent. Shipping company Freightos told customers China’s latest shutdowns could constitute “the most significant logistics disruption” since the virus first surfaced.

Across the world in Germany, a chamber of commerce survey found 51 per cent of German companies’ logistics and warehousing were already “completely disrupted” by the China situation. The situation could even worsen when the shutdowns end with huge pent-up orders further overwhelming supply chains, logistics experts warn.

The Shanghai government has drawn up a list of 666 factories that need to be opened rapidly. These include technology, medical supplies and auto components companies. Some of these firms like Tesla have already resumed work partially, even though the city is in a tight lockdown. Around 50 per cent of key factory staff are reported to have returned at some plants though the government claims attendance is higher.  

China is also moving swiftly to prop up its economy. The yuan has already fallen sharply against the dollar in the last month and the central bank has cut its reserve ratio so that banks can hold less foreign exchange and thus strengthen the currency. Small tax cuts and monetary easing can be expected in coming months.

How will all this affect Indian businessmen? Bear in mind the fact that India’s imports from China climbed to a record high of $31.96 billion in the first quarter of 2022. Indian companies are importing everything from automobile parts to chemicals, textiles and inputs for fertilisers. Already, industries from automobiles to drones are saying it’s tough to source crucial components.

Could there be a silver lining in this particular Covid-19 cloud for India? They may not admit it, but many international business people have long maintained privately autocratic regimes are more dependable and will not be roiled by social change. Now, many are realising doing business in China can also come with a high degree of unpredictability. Global investors have been pulling out billions from Chinese stocks and bonds.

President Xi Jinping slammed the country’s tech giants over the last two years, sending high-profile business stars like Jack Ma almost into hiding. The real estate barons have also been cut to size. And there’s been an almost never-ending battle against corruption, western-style capitalism and the anti-US stance that President Xi Jinping’s spearheaded.

Says one observer who has wide experience of doing business in China: “All this is worrisome for foreign businesses. Everyone was betting on authoritarianism being stable.” Adds another China-watcher: “If a company wants to shortlist a Chinese supplier, they’re likely to shortlist someone who has a manufacturing capability in China and somewhere else.” That’s an insurance should production be hit in China.

While Beijing is not part of China’s industrial heartland like Shanghai, prospects of further shutdowns in the capital and elsewhere are worrying businessmen and economists who note that supply chain troubles spell greater competition for goods which means higher inflation everywhere. That’s already a problem in India which has been grappling with double-digit wholesale price inflation for a year. 

The Chinese government also has an important deadline by when it must knock Covid-19 on its head. The 20 th Party Congress will take place in October or November in Beijing and over 2,000 delegates will gather.

Xi would like to have a success story for his leadership. In the normal course, this would have been when Xi stepped down after his second term. But when he didn’t anoint a successor at the 19 th Party Congress, it was a clear he had no intention of leaving office. (In 2018, the government scrapped the law that the leader must retire after two terms) Pandemic or not, it seems almost certain Xi will remain at the top. Manoj Kewalramani, fellow, China Studies, Takshashila Institution, points out there are no challengers to Xi and he’ll almost certainly be able to get his candidates into key positions.

China had predicted its GDP would grow by around 5.5 per cent this year, a target pretty well everyone expects the country to now miss. China will be dealing with its own inflation problem in coming months and exports are likely to be lower than expected. The government has already moved to stop fertiliser and steel exports. Can the government maintain its stringent control of the pandemic and the economy amidst growing geopolitical risks caused by Russia’s war on Ukraine? It’s certainly going to be a rocky ride.

Published on April 26, 2022
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