How Long Can China’s Economy Cope With Zero COVID? – BRINK – Conversations and insights into global business
A truck driver wearing a protective mask walks past containers at the port of Yangshan, China. Shanghai is under an intense COVID lockdown, as are an estimated 87 of the top 100 cities in China.
Photo: Yves Dean/Getty Images
President Xi Jinping’s zero-tolerance policy towards COVID kept the number of cases low for the first two years of the pandemic. But the infectivity of the Omicron variant makes it much harder to pull through.
It is estimated that 87 of the 100 largest cities in China are now under some form of movement restriction. Shanghai is in an intense lockdownwhich severely affects the living conditions of its 25 million inhabitants.
This is beginning to affect global financial markets and supply chains. BRINK spoke to David Dollar, an expert on the Chinese economy at Brookings, to assess the economic impact.
DOLLAR: It seems that the zero-tolerance policy is having a negative impact on the Chinese economy. According to official data released last week, China’s economy grew 4.8% in the first three months of this year compared to the same period last year. However, much of this growth was only seen in January and February. There is no question that China’s economy has been slowing, and there are anecdotal reports of certain ports suffering from major backlogs and cities being closed.
China is a big country, so closing some cities won’t necessarily have an overwhelming effect, but it will definitely have a negative impact on China’s growth.
EDGE: The impact will depend on how long this goes on – any sense of whether the government is determined to stick with the policy?
DOLLAR: China has an important Communist Party Congress in November, so I would be surprised if they change their policy before November. But President Xi has sent a message to local officials to pay attention to the growth, and there are examples of cities changing their quarantine policies, such as switching from a three-week quarantine to a one-week quarantine. Or in Shenzhen, the factory that manufactures many Apple products was allowed to continue operating. So I’d say you’re seeing some local flexibility, but they’re basically sticking to their zero tolerance policy.
EDGE: Do you already see signs that this is spreading in global supply chains?
DOLLAR: Ukraine [conflict] is having a major impact on the global economy, and the spread of COVID in China is an additional negative factor, but to a lesser extent so far. However, the longer this goes on, the more it will eat away at China’s annual growth rate.
Financial markets hate the uncertainty surrounding Ukraine [conflict]the impact on the world economy and what is happening to China.
One thing in China that we saw with the first wave of COVID is that when things shut down for a month or two, they work extra hard to recover. And that’s kind of a natural tendency, but China is particularly good at it. Often they get close to yearly goals, have a bad few months, and then work super hard for a few months. But of course, if the spread of cases continues throughout the year, you won’t be able to catch up in 2022.
EDGE: I’ve seen some forecasts suggesting this could take a notch off GDP growth. Do you think that’s too pessimistic?
DOLLAR: They have a target of around 5.5% GDP growth for the year and they made that decision before Ukraine [conflict]. Frankly, even putting COVID aside, this already seemed like a very ambitious goal given the challenges they were already facing domestically with their real estate and the tech crackdown.
If you add in Ukraine [conflict], the notion that COVID could subtract a point or more from that 5.5 target seems realistic. Financial markets hate the uncertainty surrounding Ukraine [conflict], the impact on the world economy and what is happening to China. So it’s not surprising that stock markets fluctuate wildly.
When it comes to Ukraine, China is the poster child for a country that imports a lot of oil, natural gas and wheat. And the [conflict] has affected prices worldwide, so it doesn’t matter where China imports its oil and gas from – these prices have risen very dramatically. This is a big shock to the Chinese economy.
EDGE: How does that play with inflation when the Ukraine crisis drags on and there is this continued zero-COVID policy?
DOLLAR: Well, China has much lower consumer inflation than we do in the US or even in Europe. And that actually puts them in a position where they can loosen their monetary policy while we are going to tighten our monetary policy. So that gives them some leeway to stimulate the economy with both fiscal and monetary policy.
It’s a bit of a mystery how consumer price inflation has stayed so low. This recent spread of COVID has now lasted long enough that the prices of many services have fallen because people are not traveling as much or going out to restaurants. So you have price cuts on services. And compared to Americans, people don’t drive nearly as much, so high gas prices don’t impact household budgets as much. So their inflation is pretty modest and they have room to stimulate.
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