A deserted street in Shanghai on April 9. The Shanghai government has announced tweaks to its lockdown policy, yet overall measures remained stringent as residents living in communities with Covid-19 cases in the past seven days are barred from leaving their homes. Photo: Bloomberg
Opinion
Macroscope
by Andy Xie
Macroscope
by Andy Xie
In the end, reality may force China to compromise on its ‘zero-Covid’ policy
China’s approach to containing its latest Covid-19 outbreaks is disrupting supply chains and could cause damage well beyond the country’s borders
While economic costs alone will not bring a change of direction when politics is driving policy, the reality of the virus’ infectiousness may compel Beijing to tolerate certain levels of infection
The Chinese economy is expected to take a heavy hit from the spate of Covid-19 lockdowns. As the Omicron variant of Covid-19 proves to be enduring despite the deployment of harsh lockdown measures, the economic disruption could expand even further in the coming weeks and months.
The disruption to the global supply chain could get worse, while the slow-motion bursting of China’s property bubble could turn into a rout. But despite the dire economic consequences, changing the “zero-Covid” policy would be very difficult before the 20th national congress of the Communist Party.
China’s zero-Covid policy achieved considerable successes during the first two years of the pandemic. As lockdowns contained the virus at home and stringent quarantine measures on inbound travellers kept the virus from arriving from abroad, China became a bubble of normal life.
Children at a playground inside a shopping complex in Shanghai on June 21, 2021. For two years, China’s zero-Covid policy was a success, keeping the country in a bubble of normal life. Photo: Reuters
This allowed China to continue normal production. As the pandemic disrupted production elsewhere, China’s exports surged and delivered good growth for the whole economy.
The good time was always dependent on China’s digital surveillance system spotting the virus faster than the virus spreading. With the arrival of the Omicron variant, the balance has gone the other way big time. It can spread several times faster than the original virus and, going by Shanghai’s data, most carriers appear to be asymptomatic. When the system identifies one case, it is already widespread.
The only response whenever one case pops up is total shutdown. Shanghai stayed with the old routine for a while and had to go for total lockdown later. Many cities are still doing what Shanghai was doing. This means that more cities will go into total lockdown soon.
When the virus is stamped out in one city, it can open only within because the virus is still out there elsewhere in the country. China can go back to a time before Omicron only after the virus is stamped out in the entire country. That could take many months, even if it is possible.
If this happens, China has to quarantine foreign visitors much longer than before as the old requirement of two weeks failed. That would further isolate the country from the world.
Omicron means random, rapid and lasting lockdowns all over the country. The service sector, which makes up more than half of the economy, has been severely hit. As the government has not provided cash assistance to small and medium-sized businesses, their bankruptcies could engulf the country.
Widespread lockdowns disrupt supply chains within the country. The auto industry is grinding to a halt. Many other industries are in the same quandary. The odds are that China’s economy is contracting at a double-digit rate.
The supply chain disruption within China is a huge shock to the global economy. It means economic contraction and spikes in inflation. In the past two years, the resilience of China’s manufacturing prevented inflation from going even higher. When this goes, inflation could surge out of control.
The bond market could finally cave in and collapse in anticipation of sharp increases in interest rates. The ensuing asset deflation could plunge the global economy into deep recession. As China is dependent on exports at the moment, the boomerang effect would be devastating.
The plummeting economy could turn the slow-motion bursting of the property bubble into a rout. China’s property bubble began to burst last year. As the government has control over how and when creditors can pull the line, seize collateral or liquidate seized assets, China’s property story was following Japan’s from three decades ago. But an economic collapse could send the whole thing crashing down, just like what the Asian financial crisis in 1997 did to Japan’s property bubble.
The economic costs of the zero-Covid policy are enormous, but mere GDP contraction won’t result in a change of direction when politics is driving policy. The Cultural Revolution lasted for 10 years despite economic collapse. Markets tend to think that, when a policy drives an economy to the wall, it will be abandoned. You need a lot of luck to be right this time.
Perhaps the human cost of the zero-Covid policy will have more sway. As lockdowns disrupt normal hospital operations, more excess deaths are occurring. Emergency medical services for heart attack patients come too late or are not available. The elderly population in big cities such as Shanghai can also experience isolation-related deaths. It is now obvious that deaths from lockdown far exceed those directly from Covid-19.
One possible ending is Omicron overwhelming the system completely. As the government has to compromise on food production and delivery and other essential services, the virus could stick around despite widespread lockdowns. Tolerating certain levels of infection could become a fait accompli. Without even an announcement, China’s Covid-19 policy could become like that in other Asian countries such as Japan or South Korea.
The economy could return to normal in the fourth quarter of 2022. Any relief from the impact of the zero-Covid policy will come months too late and after incurring enormous financial, economic and health costs.
