Making Sense of Zero Covid

If one were to have arrived in the traditionally bustling Chinese metropolis of Shanghai on any given day over the past 2 months, a dream may have seemed the most likely explanation for the scenes beheld. Either that or having somehow been transported back in time by two years to 2020 when the Covid-19 virus first entered our collective global conscience. The Chinese authorities’ decision to implement a total lockdown on a city of 26 million is surely not one that was taken lightly and is one that has raised more than a few eyebrows both at home and abroad. The specific measures employed for China’s latest round of lockdown restrictions will certainly have elicited further surprise, even consternation. From the creation of what effectively amounts to internment camps for the sick, to the conversion of schools and recently completed apartment complexes to containment facilities, the response has been as dramatic as any Hollywood inspired contagion tale could conjure (Gan, 2022).

Figure 1: The extreme containment measures employed by the Chinese government increasingly stand out for their ongoing severity

Anecdotes of senior citizens being pried from their homes in the dead of night, to be wheeled off to quarantine camps which show little evidence of adherence to social distancing or general Covid-19 containment guidelines read like something from a dystopian novel, rather than an ongoing practice in one of the world’s most advanced, and globally relevant cities. The more than questionable handling of actual citizens’ health and safety amid the ongoing crackdown has led many to question both the effectiveness, and true purpose of such a campaign (Yuan, 2022). While Shanghai may be gathering the bulk of headlines due to the extreme nature of the protocols in place there and the global profile of the city itself, China’s latest round of Covid containment measures extend much further. As of last month, a total of 45 Chinese cities accounting for almost 400 million people were experiencing some kind of lockdown restrictions (IANS, 2022). Given China’s central role in the global economy as the world’s largest manufacturer and exporter by a considerable distance, the fallout of course does not end there.

Domestic Difficulties

In many ways, China’s fresh assault on Covid-19 cases could not have come at a worse time, with the Chinese economy already struggling on multiple fronts. Domestically, Chinese authorities have been attempting to quell the impact of what appears to be a hugely significant speculative property bubble. With home prices in Tier 1 Chinese cities such as Beijing, Shanghai and Shenzhen already at values in excess of “30 times average annual incomes”, and rental yields coming in at a paltry less than 2% of property values, the signs have long been present that the Chinese construction sector may have bitten off more than it can chew (Brooker, 2022). The default of Evergrande, one of China's largest property developers last December served as a late, rather than early warning sign that the Chinese property market may be in trouble. Prior to their default, Evergrande had accumulated a total debt of around $300 billion (Farrer, 2021). Given that China’s real estate sector accounts for around 29% of its overall GDP (Smith, 2021), any potential slowdown in this sector could have devastating ripple effects throughout the economy as a whole (Hale & Yu, 2022).

Figure 2: Ordinarily bustling city streets and roads lie utterly abandoned in the aftermath of the Chinese Government's latest round of Covid restrictions

Bearing in mind the risk of over-reliance on any one economic sector, Chinese authorities have long sought to boost domestic consumption and see it become the key driver of growth within the Chinese economy. As well as helping to guard against the impact of external economic shocks, a population of 1.4 billion means that China’s is the the single largest domestic consumer market on earth, making it a major untapped resource in the Chinese government’s battle for economic sustainability (Cheng, 2020). Progress in this area has proven far slower to date than Chinese leaders would like.

The latest figures published for 2020 show Chinese household consumption as accounting for 38.11 percent of GDP, far below the approximate global average of 63.69% (“China: Household consumption”, 2022). The ongoing fear of a fresh wave of Covid-19 infections, and the extreme lockdown protocols likely to accompany them had already served to stall the anticipated rise in Chinese domestic consumer demand over the past two years. Such concerns appear now entirely vindicated, with China’s latest wave of Covid restrictions accounting for an 11.1 percent year on year drop in retail sales for the month of April 2022 (AFP, 2022). With mobility currently heavily restricted across China, with particular reference to its two largest economic centres Beijing and Shanghai, this pattern has been replicated in the domestic Chinese tourism industry. Tourism revenues for the recent May holiday totalled $9.95 billion, a mere 44 percent of pre-pandemic levels for the same period (Cheng, 2022).

The Wider Picture

When dealing with an economy as vital and dominant as China’s, any major fallout will cast major ripple effects throughout the global economy. Data produced by shipping analytics firm Windward demonstrate that at one point in April, a total of 27.7% of all ships on the entire planet awaiting docking were doing so outside of Chinese Ports (“Chinese Port Congestion”, 2022). Shanghai, the world’s largest port in terms of container throughput and the key export hub for the world’s largest exporting nation, accounts for a significant portion of these ships (“Nearly 25% of the world’s”, 2022). Given China’s pivotal role in the Global Supply chain, and the hugely detrimental impact of lockdown restrictions on production efficiency, the costs of China’s latest round of restrictions are certain to be felt, well, everywhere. It is not an exaggeration to say that China’s ongoing “Zero Covid” policy will significantly reduce the entirety of global trade volume for at least the next number of months (Huang, Kuhanathan & Uriel, 2022). As basic economics and the ongoing conflict in Ukraine at the hands of Russia teaches us, any reduction in supply leads to an increase in price. Two industrial sectors which are likely to suffer the most immediate impact are electronics and automotive, with producers in these areas almost entirely dependent on Chinese suppliers for a host of vital production components.

Figure 3: Ghost apartment complexes such as this one characterise the speculative Chinese property bubble which appears set to burst

Firms with a heavy presence in, and or dependence on Chinese manufacturing and distribution are likely to be the first and most sorely affected by China's latest wave of Covid controls. Tech giant Apple serves as a prime example of such. Given their almost exclusive reliance on Chinese manufacturing, coupled with their increasing dependence on the Chinese domestic consumer market, Apple lies extremely exposed to the whims and fancies of China’s continued war on Covid-19. Apple have already stated that this latest round of Covid restrictions may result in as much as a $4 - $8 billion loss in revenue for the company for the period of April-June 2022 alone (Ians, 2022). On the automotive front, the continued supply chain difficulties experienced by the world’s leading electric vehicle manufacturer Tesla at their Shanghai production facility further highlight the perils of depending on a country operating such an extreme and ongoing Covid policy. In China alone, Tesla’s sales for April 2022 have shown a 95% month on month drop, while the company have been forced to halt all exports from Mainland China during this time (Kolodny, 2022). Having already felt the bracing impact of this latest set of supply disruptions, both companies serve as prime examples of the increased risk of a post-covid China-based manufacturing strategy.

When Zero Covid Made Sense

China as a nation may ironically be the best prepared of any in terms of handling an extensive lockdown rollout. Ironically – in the sense that simple logic would dictate that the world’s most populous nation could not possibly be the easiest to “lock down”. China, however, has formed in this area, having successfully implemented one of the world’s strictest and most extensive Covid lockdowns at the outset of the pandemic in early 2020. Initially, China’s extreme measures had a predictably devastating impact on economic activity, with the Chinese economy recording a 6.8% year on year, and a massive 9.8% quarter on quarter decline in GDP for the period of January – March 2020. To set these figures in perspective, this was China’s first ever quarterly contraction in GDP since the practice of quarterly record taking began in 1992 (Crossley & Yao, 2020).

Figure 4: The extreme nature of China's ongoing Zero Covid policy has created a truly surrealist dystopian environment out of once vibrant settings

The upshot of the draconian containment measures however was an incredibly rapid steadying of the ship. Chinese GDP growth began to rebound immediately in the second quarter of 2020. While much of the rest of the world’s nations were only beginning to come to terms with Covid-19 and its extraordinarily wide-reaching industrial and societal implications, Chinese industry was already back on its feet and back to work. Amidst widespread predictions of ongoing struggle throughout 2020, the Chinese economy rebounded far quicker than almost any expected. A 9.1% quarter on quarter increase in exports for the second quarter of 2020 (OECD 2020) helped to drive a 3.2% year on year increase in overall GDP over the same timeframe (Tan, 2020). An astonishing accomplishment in the midst of arguably the most challenging economic conditions seen this century, and only rivalled by the global financial crisis of 2009. China was notably the only G20 economy to achieve growth in its export sector during this period (OECD, 2020). The US economy by comparison recorded a 32.9% year on year decline in GDP for the same period (BEA, 2020).

This Time It is Different

China’s Zero-Covid policy and the extreme containment measures that accompany it may have worked the first time around, such a trick however is unlikely to work twice. In contrast to this time two years ago, the rest of the world is now back on its feet and much further along in their management of Covid-19 as part of what is now everyday life. As China continues to persevere with a Covid policy that seems increasingly at odds with reality itself, it now risks falling behind its own grand ambitions as it continues to bear the enormous social and economic costs of its campaign. Chinese authorities appear to be gambling on the global reliance on Chinese manufacturing. While this is certainly the case for now the extreme uncertainty generated by an ongoing Zero-Covid policy is likely to test this resolve over time. A recent survey by the German Chambers of Industry and Commerce showed 47 percent of German companies in China were reconsidering the scale of their activities there, while one in eight were considering exiting the country outright. The American Chamber of Commerce in China have also warned of a significant reduction in foreign investment should the Chinese government persevere with their Zero Covid strategy (Reuters 2022).

Figure 5: hina appears set to persevere with a Zero-Covid strategy that shows no immediate sign of abatement

In China’s favour is the difficulty of repatriating industry long-since departed from previous manufacturing hubs such as the USA and Great Britain. The time and cost of establishing large-scale manufacturing operations elsewhere would be extraordinary. Not to mention the loss of manufacturing know-how that has built up in China over the past now several decades, and the unrivalled scale at which modern China is capable of operating. As an added incentive, China also remains the single largest domestic consumer market on the planet by a considerable distance. While frustrations abound regarding Chinese Covid containment measures, money talks, and foreign companies appear extremely unlikely at this moment to forego operations there, and a bite at the cherry that is the Chinese consumer market. The Covid Pandemic on the whole has already given cause for many to rethink our almost total dependence on Chinese manufacturing, but the logistics of such a sea-change are not something that can be undertaken lightly. For now, ordinary citizens all over the world remain in the throes of Chinese policy making, much like the Chinese people themselves.

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