China Watch: Choosing Zero COVID Over Economic Growth

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President Xi Jinping’s decision to double down on a zero-COVID policy suggests he is increasingly uncompromising in putting politics above economics.  In contrast to his two predecessors, Xi has been much more willing to sacrifice economic growth in favor of political control.   

  • On May 5, China reaffirmed its zero-COVID policy and warned that any criticism is a challenge to the Party’s and Xi’s leadership.  Xi has touted China’s previous success in controlling COVID as evidence of China’s superiority over Western democracies, and to change course now would be tantamount to an admission of failure.  

Lockdowns may not be effective against the Omicron variants and will cause more economic hardships and further disrupt an already stressed global supply chain.  The head of the WHO this month called China’s strict policy unsustainable against Omicron; his comments were dismissed by Chinese officials and censored in China.

  • China’s economic growth in 2022 is forecast to be as low as 3.8%, falling short of the government’s official target of 5.5% and well below last year’s 8.1%. Unemployment is rising. For example, as of April 2022 only 46.7% of recent college graduates had received job offers – a significant drop from 62.8% in 2021.
  • Shipping delays in and out of China are likely to last well into the summer because of port disruptions, restrictions on truck drivers, and factory closings.

Although China can mitigate the effects of a slowdown through a large stimulus package, fiscal largess risks worsening China’s serious debt problem that has worried Beijing for years.  The government has announced plans to stimulate the economy through infrastructure spending, easier access to credit, and unemployment assistance.

  • Local governments are selling special bonds at a record pace and have relaxed curbs on real estate-related loans.  Beijing has also allowed local governments to rely more on off-balance sheet financing to fund infrastructure projects.
  • Beijing had previously cracked down on local government debt and lending in the real estate sector because of the risks of sudden defaults.  

Confidence in China’s business environment is eroding.  Foreign companies are losing patience, and Beijing will need to show that it still welcomes them and is serious about market-driven reforms.  New travel restrictions on Chinese citizens are further fueling concerns that China is looking inward. 

  • 23% of the 372 companies that responded to a European Chamber of Commerce in China survey released in May said they were moving out of China.  Other than COVID, foreign companies also have been frustrated by Beijing’s crackdowns on various business sectors. 
  • China’s immigration and border control agency on May 12 announced that it was restricting Chinese citizens – including dual citizens – from leaving the country for non-essential travel in order to curb the spread of COVID.  Although the restrictions mainly apply to personal travel, business travel is also being scrutinized. These are on top of existing restrictions on foreigners travelling to China. 

China’s COVID policy will complicate US-China relations and lend credibility to those who advocate a “decoupling” of the two economies.  As inflation persists, American policymakers and politicians will blame China for disrupting the global supply chain, especially as campaigns get under way ahead of the mid-term elections.   

  • Ironically, even China appears to be concerned about an overreliance on its factories.  Chinese media in February criticized Apple for its overreliance on Chinese suppliers, to the detriment of Chinese consumers.
  • Trade tensions with the US and the war in Ukraine have prompted Chinese policymakers to emphasize the need for self-reliance in several sectors, ranging from high-tech components to food supply.