The Economic Cost of China’s COVID-19 Policy

The Economic Cost of China’s COVID-19 Policy

The Chinese government’s decision to insist on a zero-tolerance approach toward COVID-19 may come at a great cost to the country’s economy.

WHAT’S HAPPENING?

The Chinese government’s decision to insist on a zero-tolerance approach toward COVID-19 may come at a great cost to the country’s economy.

KEY INSIGHTS

– China’s economic centers are continuing to lock down just as the rest of the world has lifted pandemic restrictions behind.
– Renewed domestic outbreaks of the Omicron variant have only increased the government’s determination to eliminate the virus.
– China’s economy could suffer greatly this year and these effects will have lasting economic ramifications for years to come.

CHINA STAYS CLOSED

China’s “zero-COVID” policy has been at the center of the government’s efforts to control the spread of COVID-19 since the outbreak of the pandemic. China’s policy of intolerance toward even single cases of infection was generally successful — until a recent outbreak in Shanghai.

During the height of the global pandemic, the rest of the world watched from intermittent lockdowns as Chinese citizens held crowded pool parties, free from pandemic-related restrictions such as face masks or social distancing. Some tried to emulate China’s approach, but over time, and as increasingly contagious variants emerged, one country after another was forced to admit defeat and eventually open their economies up to the rest of the world. Living with the coronavirus replaced the ambition of trying to control it. But not for China. With the sole exception of North Korea, the Chinese government is the last country to still refuse to live with the disease. However, the Omicron variant now pushes the Chinese government’s resolve to its limits. Eventually, China will have to start opening up again, but it will be a tough road ahead until then if the path the government has taken thus far is any indication.

THE GREAT WALL OF ZERO-COVID

On March 28, 2020, China closed its borders to virtually all foreign travelers. Two years on, the country remains largely cut off from the rest of the world. Those that are allowed to enter are subject to a lengthy and costly quarantine. 

Local outbreaks, no matter how small, have been crushed swiftly. In October 2020, after 12 cases of COVID-19 appeared in the city of Qingdao, all nine million residents were locked down and tested within five days. Two months later, shortly before Chinese New Year, 11 million people in the city of Shijiazhuang were suddenly placed under lockdown after an estimated 100 people contracted the virus. 

These ad hoc lockdowns and large-scale testing efforts continued throughout 2020 and 2021, making life highly uncertain for those trapped inside affected cities, but at the same time allowing most people to live normal lives, without the need for any COVID-19 restrictions.

At first, the government’s efforts enjoyed great levels of support among the population. Since the beginning of the pandemic, the Chinese government and media have been relentlessly criticizing failed efforts of Western governments to control the virus and protect their citizens’ lives. The West’s approach to living with COVID-19 has invariably been portrayed as a death sentence to their people, and proof that the Chinese government loves its citizens. Any counter-narratives were quickly censored. Then came Omicron. 

China’s tech hub, Shenzhen, went into lockdown in early March, following an outbreak of the Omicron variant. This was quickly followed by another major outbreak in China’s largest city and economic hub, Shanghai. Various restrictions were put into place throughout March across parts of Shanghai in an effort to stem outbreaks locally but to no avail. 

For some time, it appeared as if China might start living with COVID-19. On March 25, Shanghai’s local government even announced that it would not implement a widespread lockdown. But three days later it backtracked and locked down the city’s east side followed by its west side. This proved ineffective, so the entire city of 25 million people was locked down indefinitely. After this action, global supply chains took a major hit as Shanghai’s port was simultaneously shut, leaving container ships out at sea, and an outflow of foreign investment ensued.

Many residents of Shanghai had trusted the government’s assurances that the outbreak was under control and were therefore unprepared for a sudden and indefinite lockdown. Amidst the chaotic situation, reports of food shortages and an inability to obtain vital medication were mounting. Expo centers and warehouses became overcrowded makeshift quarantine centers, as the government continued to insist on isolating those who tested positive, which included forcefully separating positive children from their parents. Chinese social media platforms were flooded with petitions for help by desperate Shanghai residents.

The lockdown in Shanghai has since been loosened for certain low-risk areas, but uncertainty remains. In the past, Chinese lockdowns were maintained until the last trace of the coronavirus had been eradicated, but this approach is now being tested. On April 5, China’s daily COVID-19 infections surpassed 20,000 for the first time, with more than three-quarters of cases coming from Shanghai. Given the country’s size, this number appears insignificant, but for China, it is an unprecedented record — one that has since been far surpassed.

President Xi Jinping has rejected giving up the zero-COVID policy. This may in part be due to issues with China’s vaccination strategy. While China boasts an overall vaccination rate of above 80%, only half of the over 80-year-olds have received two jabs. One reason for this hesitancy is vaccine skepticism. The Chinese government has repeatedly warned its people that Western mRNA vaccines are dangerous. This warning was accompanied by the message that only the Chinese inactivated vaccines were truly safe. But many of the elderly lived through the Cultural Revolution of the 1960s; they know better than to blindly trust the government.

Complacency is another issue. Due to China’s success in keeping the virus out, many did not worry about contracting COVID-19. Hong Kong is an example of the danger of an unwilling elderly population. At the start of Hong Kong’s current Omicron wave, only one-third of the people aged 80 and older were vaccinated, leading to one of the highest pandemic-related death rates in the world. A similarly widespread outbreak of COVID-19 in China could kill millions. Furthermore, Chinese-made inactivated vaccines are less effective at protecting from Omicron transmissions than mRNA vaccines, and China has refused to approve foreign-made mRNA vaccines domestically. Zero-COVID will eventually have to be phased out, but now may not be the time the Chinese government would have wanted to start.

PERSISTENCE IS VICTORY

In October 2022, the Chinese Communist Party will hold its 20th Party Congress, during which President Xi is expected to defy precedent and seek a third term. It was widely expected that China would maintain its zero-COVID policy until then, and start opening up thereafter. The current outbreak in Shanghai will be a litmus test of Beijing’s commitment to maintaining zero-COVID. But returning Shanghai to normal will come at a great cost. Even if successful, there will likely be more outbreaks to come, as a recent increase in cases in the Chinese capital Beijing shows.

The time of being a coronavirus-free bubble is over. 87 of China’s Top 100 cities have recently come under some form of pandemic restrictions, while the rest of the world has largely dropped pandemic-related measures. China will likely be the most restrictive large economy throughout 2022, thereby reversing the trend of 2020-21, when China could proudly claim to be the only open major economy. 

Despite attempts to spur economic growth, Beijing’s current approach is zero-sum: either economic recovery or zero-COVID, it cannot have both. Millions of workers are required to control mere thousands of cases. As a result, China’s economy will likely be severely suppressed throughout the year. The country’s first-quarter growth was an impressive 4.8% year-on-year, but only because it preceded the Shanghai lockdown. 

Global supply chains will continue to be strained, as Chinese factories and ports are subject to rolling lockdowns, which will further exacerbate the already unprecedented outflow of foreign investment. Some of that investment may return to China, as happened following China’s economic recovery in 2020, but other changes will be more permanent. Apple has already shifted some of its iPhone production to India and is expected to significantly increase its manufacturing base outside of China by the end of the year. Other companies are likely to follow.

However, if Omicron and its economic impact cannot force the government’s hand, public sentiment may. Shanghai’s chaotic lockdown has caused many to rethink the utility of zero-COVID, especially as countries around the world have returned to normal. And even if Chinese lockdowns could become better organized, they are so severe that life essentially stops for those affected, as they are confined to their homes indefinitely. As such, it is likely that present dissatisfaction with government policies will continue to grow.

Before China can open up, the government’s official narrative will have to change. This has not happened so far and is unlikely to be successful as long as a significant part of the vulnerable population remains unprotected, especially since Chinese vaccines are unlikely to slow the spread of Omicron. Although Pfizer’s Paxlovid was recently approved for use in China, foreign-made mRNA vaccines will probably not follow anytime soon.

The Chinese economy will reopen to the outside world in the long run, but in the near term the economy will be highly volatile, and the trend of foreign firms diversifying their supply chains away from China will continue. To many Chinese citizens, trust in the government’s approach to COVID-19 has been broken, as extreme pandemic measures become more fearsome than the virus itself. Nonetheless, the government is unrelenting. “Persistence is victory,” as Xi has said. But as the lockdown in Shanghai drags into its second month, victory over this outbreak – let alone the pandemic – remains out of reach.

The irony is that, while 2020 was an immense shock for the global economy as China managed to maintain growth, 2022 may turn out to be China’s 2020. Its economy will suffer — perhaps even shrink — as it pursues zero-COVID. Consequently, 2023 would likely see a strong economic recovery for China, if the country starts opening up by then. Until then, it will be a tough road ahead.