Financial Mirror (Cyprus)
China struggles to balance Zero-COVID and the economy
Beijing’s inability to admit shortcomings of its pandemic strategy threatening growth and may push it closer to Moscow
Shanghai, China’s largest city and financial center, has been under strict lockdown since April 1 to contain an outbreak of the COVID-19 omicron variant. Although the government is considering relaxing restrictions in the city starting this week, other parts of China are likely to introduce severe restrictions soon as the virus spreads across the country. Guangzhou (a southern transportation hub), Suzhou (an eastern industrial city), Shenzhen (a southern tech hub) and Xiamen (a port city in the southeast) are all rumored to be next.
Perhaps most significant, there’s some indication that Beijing could also soon impose a lockdown. Locals have already started stockpiling food, and the director of the Beijing Municipal Health Commission was put under investigation on April 16 for allegedly violating unspecified rules, possibly indicating that authorities believe the virus is spreading into the capital.
The lockdowns are increasing the pressure both on China, where frustration with the restrictions is growing, and on the world economy, which has already seen massive supply chain disruptions over the past two years. To understand why Beijing is reacting the way it is, we first need to understand the unique constraints the government is facing.
Limitations of Zero-COVID
It might seem odd that the Chinese government is imposing strict lockdowns at a time when the rest of the world is opening up. But with infection numbers rising and health services becoming overwhelmed, Beijing has backed itself into a corner. It previously touted the success of its strict zero-COVID strategy, using this as an indicator of the government’s ability to manage the crisis better than other countries, and it can’t abandon the policy now.
However, as the virus spreads to more and bigger cities, the government’s fidelity to this strategy is turning into a political burden. The public’s expectation that lockdowns will protect the population from the virus has contributed to a low vaccination rate among elderly Chinese. Over half of Chinese citizens aged 65 or above – more than 92 million people – still have not received three vaccine doses. About 20 percent of the population aged 60 and older, and more than 40 percent of those older than 80, hasn’t received their first dose. Many believe that the side effects of the vaccine are worse than getting COVID-19, while others believe that the vaccine isn’t effective anyway.
Indeed, the Chinese Sinovac-CoronaVac vaccine is not as effective as other vaccines. And with the emergence of omicron, a COVID-19 variant that was considered mild in the West, this has become an even bigger problem. In Hong Kong, the first omicron wave generated the highest COVID19 mortality rate in the world. What happened in Hong Kong was proof not only that the low vaccination rate poses a high risk for the Chinese health system but also that the vaccinated population is poorly protected against the coronavirus. Thus, having refused to buy the more effective, Western-made vaccines, both the Chinese health system and the Chinese leadership are facing enormous challenges with the emergence of omicron.
According to the World Health Organization, SinovacCoronaVac offers 51 percent efficacy against symptomatic SARS-CoV-2 infection and about 49 percent efficacy against delta variants. Its efficacy against omicron is unknown. By comparison, lockdowns have a 50 percent efficacy rate
globally – which explains why they were imposed so readily early in the pandemic before vaccines were available.
China now has two choices. The first is to keep imposing strict lockdowns, as it’s currently doing. The second is to import the Western vaccines – thereby admitting the Chinese vaccine isn’t as effective – and begin another mass vaccination campaign. Considering that China wanted to position itself as a pharmaceutical leader and export its own COVID-19 vaccine to other countries, the second option is unlikely.
Beijing is between a rock and a hard place. The 20th National Party Congress, where President Xi Jinping is expected to secure his third term, is set for the second half of 2022. And although the government doesn’t want to introduce unpopular restrictions, especially right now, lockdowns are the only way to keep cases from spreading and the health care system from collapsing.
But keeping a city three times larger than New York under lockdown is tough, to say the least. For starters, delivering food to all the residents locked in their homes is difficult. This is one of the issues that has caused anger among residents in Shanghai. Then there’s the limited availability of health services. And so, with the growing frustration comes protests and civil unrest. Some demonstrations have already been held in Shanghai. These factors all make zero-COVID increasingly unworkable.
More concerning for Beijing than protests is the increasing economic problems China is facing due to lockdowns. On April 17, Shanghai authorities provided some guidance on measures firms should take to restart production in the city, such as stocking up on medical supplies and submitting COVID-19 prevention plans for their factories. China’s industry regulator identified more than 650 companies in the semiconductor, automobile and medical sectors as priority firms that should resume production.
However, just three weeks under severe lockdowns – plus varying levels of restrictions in other regions such as Jilin, a major tech and agricultural hub – have caused problems in supply chains.
On April 18, Vice Premier Liu He ordered the introduction of a nationally recognized COVID-19 test pass for truck drivers so that they can deliver goods between provinces without having to undergo screening at every stop. And in the aggregate, experts predict China’s April lockdowns have already taken between 3 percent and 5 percent off China’s monthly gross domestic product – an acceptable cost for the government. At the same time, Chinese analysts point out that actual local monthly income will drop by more than 50 percent, which could pose further problems for China’s leadership.
China’s leaders spent two years saying that China’s lower COVID-19 deaths proved the superiority of the Chinese political model. The omicron variant challenges those claims and could eventually destabilize the Chinese economy. And Xi’s position is more tenuous than normal right now. He needs enough elite support going into the National Congress later this year to head off rumblings of dissent or the emergence of potential challengers.
What’s more, this comes at a time when China is already facing challenges on other economic fronts. The first – and probably the most worrying for the government – is the potentially explosive crisis in the real estate sector, embodied by property giant Evergrande. Beijing’s plan to let the massively indebted company fail slowly to contain market panic and contagion risks is threatened by the lockdowns and resulting economic instability. Evergrande’s woes may spread deeper and faster into the real estate market, potentially causing a financial crisis.
The second major problem is an energy crunch. China is the largest producer, consumer and importer of coal, which provides more than 60 percent of the country’s electricity needs. No other energy source is more important to China, considering its large industrial base. The country needs cheap energy to maintain price competitiveness. Although China is committed to reducing its coal use from 2026 and reaching carbon neutrality by 2060, it is likely to be more cautious after coal shortages caused blackouts and factory shutdowns in 2021 following a Chinese ban on Australian coal. Another of China’s major suppliers, Indonesia, banned coal exports for a month in January.
At the moment, the lockdowns are keeping production and energy consumption down. In fact, although China’s ports haven’t been fully locked down, the situation resembles the 2020 supply chain crisis, with factory closures and driver shortages. As a result, the volume of goods shipped from Shanghai dropped 26 percent between March 12 and April 4, while the volume of goods leaving the port by truck fell 19 percent, according to FourKites, a Chicago-based company that tracks supply chain data.
At the same time, the International Energy Agency said on April 13 that it had cut its forecast for global coal and oil demand because of China’s imposition of lockdowns since March. The price of oil and other fuels has also fallen off since its explosion in late February when the war in Ukraine started.
China’s temporary shutdowns will buy time for the government to tackle the energy problem. The government has increased domestic coal output since last year’s blackouts. But expanding mining takes time and investment, and China will have to compete on international markets in the meantime. Therefore, Beijing may be using the lockdowns in part to negotiate with global coal suppliers, one of which is Russia.
The lockdowns are also certainly pushing the Chinese government to think about its priorities and shifts in the global economy. During the National People’s Congress and Chinese People’s Political Consultative Conference in Beijing in March, it was made clear that a key government concern is lower foreign demand for Chinese products. Global consumption shifted toward goods during the pandemic, but now it’s rebalancing back toward services. Many countries have begun considering facilitating local production for basic goods in order to secure their demand. If Chinese lockdowns continue, the shift away from Chinese goods may persist. Beijing is aware of the risk but can do little about it without abandoning its zero-COVID policy.
Global Economic Warfare
Russia’s invasion of Ukraine isn’t doing China any favors either, but there is little China can do about it. The war has increased uncertainty in already unstable commodities markets. It also pushed up already high energy and food prices, a trend that is likely to continue in the coming months. These higher input prices challenge China’s ability to maintain production and exports. At best, if it plays its cards right, Beijing could use the economic war between Russia and the West in its favor.
Hoping to make the most of the war, China has not joined
Western sanctions against Russia, even as it ensures it doesn’t risk secondary sanctions on itself. In the run-up to the war, with Moscow anticipating sanctions, the Kremlin worked to increase trade with Beijing. According to Chinese customs data, turnover in Chinese-Russian trade from January to February reached $26.4 billion, an increase of 38.5 percent compared with the same period last year. The 2021 figure was itself a 35.8 percent increase on 2020 numbers.
Moreover, with Western sanctions blocking Russia from using the dollar and the SWIFT payment system, China and Russia renegotiated contracts to denominate them in renminbi.
Previously, only 17 percent of bilateral trade was settled in the Chinese currency. The lockdowns have surely caused a slowdown for Russian exporters who have encountered logistical problems in shipping their merchandise into China. But the renegotiation has facilitated the restoration of Russian energy deliveries to China, with coal shipments scheduled to be the first to arrive, followed by crude deliveries.
Maintaining access to cheaper Russian commodities will be crucial to Chinese efforts to balance exports and economic growth with its zero-COVID policy. At the same time, Moscow needs partners right now and thus has its own interest in preserving good relations with Beijing. However, it will take more than cheap Russian imports to keep Chinese products competitive in Western markets.
China’s existing economic model would need to fail for Beijing to consider such a strategy – and from the looks of it, China is fighting hard to avoid that outcome. The West – and the U.S. in particular – is currently most important for China.