Can China preserve both its economy and its zero tolerance policy against COVID-19?

China’s zero-COVID strategy is beginning to derail another important issue on the government’s agenda: economic stability.

Over the past month, radical blockades across the country have halted production. Home orders have held back consumer spending. The closures are also exacerbating supply chain problems that have increased inflation and weighed on global growth.

“No part of the Chinese economy is untouched by the tightening of zero-COVID policies,” Craig Botham, Chinese chief economist at Pantheon Macroeconomics, wrote in a research report to clients this week.

The costs of prioritizing the pandemic over all else are creating a dilemma for President Xi Jinping as he prepares to take on a third term within this year.

China’s early success in stopping the spread of COVID-19 as the West floundered has become confirmation for some of the world’s most stringent virus control policies. But it is unclear how long the country’s leaders can maintain those policies without sacrificing the economic growth that has long been the basis of their government.

The 5.5% gross domestic product growth target that China set in March seems more elusive as the lockdowns continue.

Compared to the early days of the pandemic, China is now facing a more contagious variant, as well as diminishing public patience for harsh restrictions and growing criticism from the normally muted business community.

“The system’s focus on zero-COVID leads many decision makers to find themselves in some sort of self-destruct mode,” recently Joerg Wuttke, president of the EU Chamber of Commerce in China. said financial publication the NZZ Market. “They don’t care about the short-term economy.”

He said some foreign companies are so discouraged that they are considering reducing operations in the country: “China is losing its credibility as the best sourcing location in the world.”

The most consequent closure was in Shanghai, the largest city in the country with a population of 25 million.

When the virus started spreading in March, officials were slow to close factories and businesses given the economic importance of the city. But in April, the manufacturing and financial hub was completely shut down, registering tens of thousands of new cases per day.

Other cities, fearing a similar fate, were more ready to impose restrictions after local epidemics. By mid-April, 87 of China’s 100 largest cities by GDP had imposed some form of blockade, according to Beijing-based Gavekal Dragonomics.

Economists are trying to predict the impact.

A study by the Chinese University of Hong Kong and Tsinghua University estimated that a one-month national blockade would reduce quarterly GDP by 22.3%, while a block limited to the four largest cities in China – Beijing, Guangzhou, Shanghai and Shenzhen – would reduce GDP by 8.6%.

“The problem is, this thing can appear at any moment,” said Gene Ma, head of Chinese research at the Institute of International Finance in Washington. “This is what makes the situation so precarious.”

In 2020, when China blocked the entire city of Wuhan and restricted movements nationwide, GDP fell 6.8% in the first quarter of the year, but the economy quickly recovered. Last year’s growth was 8.1%.

GDP increased by 4.8% in the first quarter of this year, but with production Other service sector activity contracts in April to its lowest level in over two years, economists have gloomier expectations for the coming months.

In April, the International Monetary Fund revised its annual growth forecast for China to 4.4%, from 4.8%.

The effects of a slowdown extend far beyond China.

The global economy is already under pressure from high inflation and the war in Ukraine. The IMF, which recently lowered its global growth forecast to 3.6% from 4.4%, warned in a report that further disruptions in China could further hamper growth in countries that depend most on it for trade.

In South Korea, a major trading partner, exports have fallen to a two-year low. “This is disturbing to exporters elsewhere,” wrote Botham. “The source of the weakness is China, with an economy paralyzed by zero-COVID policies.”

Even if China is able to keep COVID in check, it still faces a struggling real estate market, falling global demand for consumer goods and high debt fueled by infrastructure investments, according to Neil Shearing, chief economist of the country. Capital Economics group of London.

The Chinese slowdown also affects the labor market, with layoffs, disillusionment of the workers and rising unemployment just as record numbers of college graduates are entering the workforce.

“While the focus has understandably been on the immediate fallout of the latest COVID epidemic, the challenges facing economic policymakers in Beijing extend well beyond the next few quarters,” Shearing wrote in a report this week.

In a video recording reported by the Financial TimesWeijian Shan, president of one of Asia’s largest private equity firms, PAG, said the fund is taking a cautious approach to investing in China as its blocking policies have pushed market sentiment and economic outlook to a minimum. 30 years old.

China is taking some measures to relieve pain.

At a Politburo meeting last week, Communist Party leaders said they would implement tax cuts, infrastructure development and assistance to businesses and individuals to mitigate economic uncertainty.

Chinese officials have also attempted to keep some factories running during the blockade with closed-loop systems, where workers live and travel within a smaller, infection-free community.

Hundreds of companies, perhaps the most important, Tesla, have been cleared to resume production in Shanghai. However, they may still struggle to get closed parts elsewhere, said Eric Zheng, president of the US Chamber of Commerce in Shanghai.

“These days when it comes to supply chains, we’re talking about different parts suppliers, so you need to open up all of those industries to support a company like Tesla,” he said. “I wouldn’t be surprised if, after COVID, companies were taking another look at their global supply chain strategy by including all of these risk factors.”

Nathan Strang, director of ocean route management at shipping company Flexport, said that although the port of Shanghai is still open, bookings have fallen by about 40% since the COVID outbreak. Its customers have been struggling with production delays and shipments interruptions and deep uncertainty about the future.

“There is growing concern as the lockdown continues,” Strang said. “They rely on their manufacturers and suppliers to give them an idea of ​​what’s going on. Trying to obtain this information has been extremely difficult and frustrating ”.