China’s Campaign to Wipe Out Covid Is Crushing Its Economy

Date: Monday, May 2, 2022
Source: Bloomberg

Virus outbreaks and a property slump are forcing Xi Jinping to put his revamp of China’s economy on hold—and he faces mounting pressure to reverse last year’s policies.

The omicron variant of the coronavirus slipped through China’s border controls and is causing the largest outbreaks since Wuhan in 2020. About a quarter of China’s population lives in cities that are now under some form of lockdown. Most of Shanghai’s 25 million residents have been confined to their homes for more than a month. High-frequency indicators, such as city-to-city truck flows, suggest China’s economy is contracting, and residents in multiple cities are struggling to find food and even dying from lack of medicines.

The economic outlook ranges from bad to very bad. In the most optimistic scenarios, the pace of new outbreaks slows as cities institute early and short lockdowns. In worse-case scenarios, China could face multiple Shanghais each month over the second and third quarters, which would raise the risk of a recession—something the country hasn’t seen in the modern era.

With roadblocks across the country to prevent the spread of infections, activity at Chinese ports has plummeted, further straining global supply chains. Chinese financial and currency markets have sold off, and demand for imports of oil and other commodities is plunging.

The human suffering is raising doubts about the Chinese Communist Party’s governing capacity. “There are a lot of unsatisfying decisions from the party,” says Ada Yuan, a finance worker in Shanghai. “This is a big lesson for all of us after the country enjoyed a safe, stable environment without Covid-19.”

It’s a contrast from the initial phase of the pandemic—when China’s successful “Covid Zero” strategy, combining strict border controls, mass testing, and quarantine of anyone infected—made it the only major economy to avoid a deep contraction. Foreign investment flowed in, and Xi and the rest of the CCP’s elite Politburo announced that the rapid rebound had opened a “strategic window” to reshape the world’s second-largest economy.

In a flurry of regulatory moves, Beijing reduced the power of China’s largest internet companies, wiped out the for-profit tutoring industry, and took on video streaming sites and delivery platforms. Then came an ambitious campaign to slow debt growth, especially in the real estate sector, which accounts for about 20% of China’s economy. The moves sent a clear signal that the party’s vision of “common prosperity”—greater equality, national security, financial stability, and technological self-sufficiency—would take precedence over the demands of big business and wealthy investors.

Growth itself was downgraded: Xi wrote his name into a landmark party resolution in November, declaring that gross domestic product was no longer the “sole yardstick” of development.

Strains from this approach became clear less than two months later, when a massive real estate slump sucked oxygen from the economy. Xi and the Politburo declared that the top task was now economic “stabilization,” and credit growth began to accelerate. Cities started to ease housing restrictions.

China’s National People’s Congress, which meets in full session for roughly a week each March, went even further. Not content with stabilizing the economy, it set an aggressive GDP growth target of “about 5.5%” for 2022. Common prosperity got a single mention in the Government Work Report, a policy document that outlines a vast range of economic and development tasks for the country to pursue over the coming year.

Political considerations most likely prompted the turnaround. At a once-every-five-years party conclave this coming fall, Xi is expected to secure a third term as party leader, in defiance of recent precedent. That means economic growth and job creation—the traditional means of ensuring social stability—are back at the top of the agenda, and dozens of senior officials across China also vying for promotion at the congress will be graded on how they deliver on these metrics.

“Beijing seems to have realized that it went too far on many things, including on tech platforms and property, and are now making course corrections,” says Tianlei Huang, an economist at the Peterson Institute for International Economics. “Economic policy is indeed more improvised this year.”

While the ink on the work report was drying, the highly infectious omicron variant was silently creeping into dozens of Chinese cities. It had already torn through Hong Kong in February, killing thousands. But China’s leadership was distracted by Vladimir Putin’s invasion of Ukraine: Unprecedentedly tough sanctions on Russia, combined with Beijing’s close ties with Moscow, had foreign money managers asking if China was becoming “uninvestable.” Hong Kong-listed Chinese stocks registered their sharpest drop since the 2008 financial crisis.

Economy czar Liu He called China’s top financial regulators in for an early morning meeting on March 16. In an about-face from the previous year, he declared they should “actively implement policies that benefit markets.”

In the tech hub of Shenzhen, officials ordered a lockdown after daily cases ticked up into the dozens, and the outbreak was suppressed in a week. In Shanghai, a financial center and China’s largest metropolis, officials initially played down the likelihood of a lockdown. So when they later declared one, many residents were caught without stockpiles of food and medicine. As in Hong Kong, lack of planning and poor execution created man-made disasters. Reports of an elderly person who died of asthma after ambulances refused to take him to a hospital attracted more than 55 million readers.

As activity in locked-down cities ground to an almost complete halt, the government directed aid at businesses, not households. Workers in the informal economy, deprived of income, subsisted on handouts from local volunteers.

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