The Crippling Effects of Xi’s Zero COVID Policy

It’s just not possible, isn't it?

The new wave of lockdown controls which have spread from the main cities such as Beijing and Shanghai to many of the fringe Chinese cities just shows how deeply committed the Chinese leadership is to ensuring zero incidences of COVID. The whole situation started in late March this year, when Shanghai went into a supposed temporary lockdown, but evolved into a state-wide situation where the city was effectively closed to any form of daily business. The streets were filled with loudspeakers blaring instructions for the testing regime throughout the day, and in the evening, residents were on the balcony protesting their lack of freedom.

Considering how China is a country known for its efficiency in building and progressing, seeing the country in such a backward state when most of the world has already somewhat moved on from COVID is quite a surprising sight.

However, it is obvious to any outsider that such a draconian strategy would have inevitable drawbacks, ranging from economic damage to psychological distress among the people. The delays and economic shock caused by such protracted lockdowns could prove even more damaging than the initial aftermath of the Wuhan outbreak two years ago.

If a cosmopolitan city such as Shanghai could be so quickly paralyzed by such a broad policy, this gives us tell-tale signs of the overall situation in cities around China.

We will be focusing more closely on how the rising pressure is eroding any chances of China reaching its lofty growth targets this year.

On the commodities side, farmers in the Northeast China Plain, which is one of the major grain-producing areas of China are unable to carry out their farming operations. This has led to a supply shortage among various restaurants and shops which are highly dependent on the grain output from this region. Furthermore, combine this with the unreliability of supply from Ukraine, and the country’s overall food supply is left in a very precarious state.

To further compound this supply bottleneck, nationwide consumption in China has been estimated to fall between 3–3.5% in March according to International Monetary Fund (IMF) estimates. This suggests that such controls are hurting more than helping to spur domestic consumption.

We also see how such anti-COVID policies are deeply damaging to the ordinary finances of affected Chinese citizens. According to government bureau statistics, more than 4.5 million small businesses closed in 2020, and more are estimated to have closed in 2021. Many citizens have also drained their savings in trying to tide over the lockdown, especially since many families have focused their consumption in the past few months on buying non-perishables to insure themselves for a prolonged lockdown situation.

This drawdown in overall household income and savings is also happening against the backdrop of the government’s questionable strategy to weaken the currency in a bid to increase manufacturing output. With a weakened yuan, the residents’ cost of living inevitably increases, and that does not bode well for increasing domestic consumption.

On a more macro scale, cities like Shanghai and Shenzhen are key maritime trade routes that connected China’s mega ports to the rest of the world. China accounts for roughly 12% of global trade, and such lockdowns only serve to idle factories, slow truck deliveries, and exacerbate backlogged cargo trapped in the maritime straits.

One could attribute the slew of all these problems to the efficacy of China’s official vaccine in the first place. Sinovac does not appear to be very effective at preventing the onslaught of symptoms and death from COVID when compared to its Western mRNA counterparts.

According to a study published by the University of Hong Kong, the early success of China’s zero COVID strategy in preventing deaths created a false sense of security since more than 130 million people in China aged 60 and above are either unvaccinated or have less than three necessary doses.

National pride has also prevented the Chinese government from approving foreign vaccines for use by its populace, which has left them no choice but to continue boosting themselves with domestically produced vaccines.

At the bigger level, this crisis spells unprecedented change in Chinese society and for the Chinese government. President Xi himself is aiming to take an unprecedented third term as head of the CCP and there is a lot of pressure locally and abroad to ensure that he is able to control the situation, before the economy unravels under his command. Right now, the choice is between kickstarting mass vaccination using imported foreign vaccines or continue absorbing the ruinous socioeconomic costs from continued lockdowns.

In my opinion, it is unlikely the government would sway from its dogmatic approach of a zero COVID policy until it is too late. The country is likely to continue relying on its extensive surveillance tools and not compromise on its national pride. They are very far down this track and it is hard to see them switching their policy 180 degrees just to cater to foreign pressure. Furthermore, evidence of their unwavering commitment to a zero COVID strategy can be seen in President Xi’s agenda in early May. During the meeting of the Central Committee for Financial and Economic Affairs, he called for efforts to boost infrastructure investment rather than address problems related to the property sector crackdown. China cannot lockdown, hit its growth target, and buy infrastructure all at one go. Therefore, it is obvious that by choosing to sustain the lockdown policy and announcing new infrastructure stimulus measures, the government is implying that it is unlikely to hit its growth outlook targets this year or even the next.

It will be interesting to see how they get themselves out of this quagmire.

Cheers.

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