China’s Economic Suicide: ‘Zero COVID’

News AnalysisChinese leader Xi Jinping has been adamant that he will maintain his “zero-COVID” policy even as it destroys China’s economy. By the first week of April, approximately 75 percent of China’s 100 largest cities, which account for over half of the GDP, have imposed COVID-19 restrictions. Shanghai’s draconian lockdown was the most widely publicized. Jilin, a major agricultural and commercial center, was also subjected to harsh restrictions. In March, the manufacturing city of Shenzhen saw a suspension of nearly all economic activity for a week. With school closures and travel restrictions being implemented in Guangdong, home to tens of millions of people, another lockdown with dire implications for international trade may be on the horizon. Going into 2022, the central government had already set the lowest GDP growth target in decades, which was 5.5 percent. But now, the Ukraine war and the Chinese Communist Party’s (CCP) adherence to a “zero-COVID” policy are slowing the economy even further. The Caixin/Markit services purchasing managers’ index (PMI), a measure of general economic activity, dropped from 50.2 in February to 42 in March. A Caixin index of less than 50 means that the economy is contracting. To put the economic damage of the Shanghai lockdown into perspective, this financial hub generates 3.8 percent of the country’s GDP and 10.4 percent of its trade. More than 800 hundred multinational firms have regional or country headquarters in Shanghai, and 70,000 foreign-owned businesses are located there. Shanghai’s seaport is the largest in the world, with a volume four times that of the Port of Los Angeles, and it accounts for 16.7 percent of China’s shipping. As a result of COVID measures, export container costs in Shanghai are five times higher and air freight rates are double what they were before the pandemic. Lockdowns are also causing port congestion. As of April 11, the number of container ships waiting off the coast of Shanghai had increased by 15 percent since March. A shortage of port workers is delaying the processing of documents necessary for unloading, and trucks are unable to transport goods to the processing mills. Consequently, port usage has seen its first contraction since 2020. Containers are seen at the Yangshan Deep-Water Port in Shanghai, China, on Oct. 19, 2020. (Aly Song/Reuters) Across the country, restrictions on truckers—such as mass testing and the need to show negative COVID results at multiple checkpoints—are causing log jams, shortages, and production stoppages. During the first week of April, freight traffic in China dropped by about 25 percent. The number of passenger trains is down to 30 percent. Flight ticket prices have also declined steeply as fewer people are able to travel. The International Energy Agency (IEA) had expected to see China’s jet fuel consumption grow by 10,000 barrels per day; however, jet fuel demand is expected to fall by 3.5 percent compared to last year. Metal producers have cut production due to an inability to ship raw materials or finished products. A Shanghai Metals Market survey found that 6 of 12 copper rod plants in Shanghai’s neighboring provinces had halted or planned to halt output. Consequently, the purchase of raw materials is declining. In March, iron ore that is used in steelmaking and in construction was down 14.5 percent. With transportation, construction, and manufacturing restricted, crude imports dropped by 14 percent year on year, and natural gas imports reached a low not seen since 2020. Technology companies were already hampered by a shortage of raw materials and regulatory crackdown. As the extreme lockdowns came, many firms terminated production. Among them were Semiconductor Manufacturing International Corp., Taiwan Semiconductor Manufacturing Co., and iPhone maker Foxconn Technology Group. As of April 13, 30 Taiwanese companies, including Pegatron Corp. and Macbook maker Quanta Computer Inc., had ceased operations. Other tech companies have adopted a closed-bubble system for employees. This may allow them to restart manufacturing, but they will still be plagued by the problems of shipping, transportation, and port congestion. Compared to figures seen in February, passenger car sales in March decreased by 10.9 percent. Shanghai’s Tesla factory has been closed since March 28, while Volkswagen AG and Chinese EV maker Nio Inc. suspended production in April. Auto parts maker Robert Bosch GmbH (commonly known as Bosch) also closed two of its factories in April. A Volkswagen sales shop inside a downtown shopping mall in Shanghai, China, on April 26, 2021. (Costfoto/Future Publishing via Getty Images) Domestic sales of excavators, a proxy measure for the health of the construction sector, decreased by nearly 64 percent in March from last year. Home sales dropped 53 percent last month from a year ago. While residents under lockdown scramble to find food, the price of fresh vegetables has risen m

China’s Economic Suicide: ‘Zero COVID’

News Analysis

Chinese leader Xi Jinping has been adamant that he will maintain his “zero-COVID” policy even as it destroys China’s economy.

By the first week of April, approximately 75 percent of China’s 100 largest cities, which account for over half of the GDP, have imposed COVID-19 restrictions. Shanghai’s draconian lockdown was the most widely publicized. Jilin, a major agricultural and commercial center, was also subjected to harsh restrictions. In March, the manufacturing city of Shenzhen saw a suspension of nearly all economic activity for a week.

With school closures and travel restrictions being implemented in Guangdong, home to tens of millions of people, another lockdown with dire implications for international trade may be on the horizon.

Going into 2022, the central government had already set the lowest GDP growth target in decades, which was 5.5 percent. But now, the Ukraine war and the Chinese Communist Party’s (CCP) adherence to a “zero-COVID” policy are slowing the economy even further.

The Caixin/Markit services purchasing managers’ index (PMI), a measure of general economic activity, dropped from 50.2 in February to 42 in March. A Caixin index of less than 50 means that the economy is contracting.

To put the economic damage of the Shanghai lockdown into perspective, this financial hub generates 3.8 percent of the country’s GDP and 10.4 percent of its trade. More than 800 hundred multinational firms have regional or country headquarters in Shanghai, and 70,000 foreign-owned businesses are located there.

Shanghai’s seaport is the largest in the world, with a volume four times that of the Port of Los Angeles, and it accounts for 16.7 percent of China’s shipping.

As a result of COVID measures, export container costs in Shanghai are five times higher and air freight rates are double what they were before the pandemic. Lockdowns are also causing port congestion.

As of April 11, the number of container ships waiting off the coast of Shanghai had increased by 15 percent since March. A shortage of port workers is delaying the processing of documents necessary for unloading, and trucks are unable to transport goods to the processing mills. Consequently, port usage has seen its first contraction since 2020.

BRITAIN-TRADE
Containers are seen at the Yangshan Deep-Water Port in Shanghai, China, on Oct. 19, 2020. (Aly Song/Reuters)

Across the country, restrictions on truckers—such as mass testing and the need to show negative COVID results at multiple checkpoints—are causing log jams, shortages, and production stoppages.

During the first week of April, freight traffic in China dropped by about 25 percent. The number of passenger trains is down to 30 percent. Flight ticket prices have also declined steeply as fewer people are able to travel. The International Energy Agency (IEA) had expected to see China’s jet fuel consumption grow by 10,000 barrels per day; however, jet fuel demand is expected to fall by 3.5 percent compared to last year.

Metal producers have cut production due to an inability to ship raw materials or finished products. A Shanghai Metals Market survey found that 6 of 12 copper rod plants in Shanghai’s neighboring provinces had halted or planned to halt output. Consequently, the purchase of raw materials is declining. In March, iron ore that is used in steelmaking and in construction was down 14.5 percent.

With transportation, construction, and manufacturing restricted, crude imports dropped by 14 percent year on year, and natural gas imports reached a low not seen since 2020.

Technology companies were already hampered by a shortage of raw materials and regulatory crackdown. As the extreme lockdowns came, many firms terminated production. Among them were Semiconductor Manufacturing International Corp., Taiwan Semiconductor Manufacturing Co., and iPhone maker Foxconn Technology Group. As of April 13, 30 Taiwanese companies, including Pegatron Corp. and Macbook maker Quanta Computer Inc., had ceased operations.

Other tech companies have adopted a closed-bubble system for employees. This may allow them to restart manufacturing, but they will still be plagued by the problems of shipping, transportation, and port congestion.

Compared to figures seen in February, passenger car sales in March decreased by 10.9 percent. Shanghai’s Tesla factory has been closed since March 28, while Volkswagen AG and Chinese EV maker Nio Inc. suspended production in April. Auto parts maker Robert Bosch GmbH (commonly known as Bosch) also closed two of its factories in April.

Epoch Times Photo
A Volkswagen sales shop inside a downtown shopping mall in Shanghai, China, on April 26, 2021. (Costfoto/Future Publishing via Getty Images)

Domestic sales of excavators, a proxy measure for the health of the construction sector, decreased by nearly 64 percent in March from last year.

Home sales dropped 53 percent last month from a year ago.

While residents under lockdown scramble to find food, the price of fresh vegetables has risen more than 17 percent nationwide. The National Bureau of Statistics’ data showed that farmers in the northeast, where much of China’s food comes from, were prevented by COVID restrictions from plowing their fields and sowing seeds. This can only add to food inflation and shortages in the coming year.

Consumer confidence and spending are down, with Bloomberg estimating that retail sales declined by 3 percent in March compared to 2021. While Beijing plans to inject economic stimulus, its effectiveness is limited if people are unwilling to spend.

Goldman Sachs is predicting a mere 4.5 percent GDP growth this year, but that number presumes that lockdowns will end at some point.

Xi remains adamant that he will stick to the zero-COVID policy and make it the top priority. All provinces have been told to prepare quarantine camps as lockdowns may be extended.

Impact on the US

China’s imports were down .1 percent in March, which is considered a lagging indicator. This means that if imports are down now, exports will be down later. A decline in imports is having direct impact on China’s trading partners.

U.S. exports to China have already fallen by 11.6 percent. Meanwhile, for all of the talk over the past two years about diversifying supply chains, many U.S. companies are still dependent on China. For this reason, as Chinese exports decrease, the United States experiences supply chain disruption.

China’s March producer price index is currently up 8.3 percent. Factory gate inflation and the cost of goods at the factory are expected to rise even further, driving up the cost of imported consumer goods in the United States.

Inflation in the United States already stands at a 40-year high, and the situation in China will just make things worse.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.


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Antonio Graceffo, Ph.D., has spent more than 20 years in Asia. He is a graduate of the Shanghai University of Sport and holds a China-MBA from Shanghai Jiaotong University. Graceffo works as an economics professor and China economic analyst, writing for various international media. Some of his books on China include "Beyond the Belt and Road: China’s Global Economic Expansion" and "A Short Course on the Chinese Economy."