China Watch: Implications Of A Prolonged “Zero-COVID” Policy

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In mid-May, we wrote that Xi Jinping was doubling down on a “zero-COVID” policy, in contrast to the rest of the world.  In June, Beijing signaled that the policy will continue into 2023 and perhaps for the next five years, heightening concerns about supply chain disruptions, China’s economy, and global economic recovery.   

  • US Ambassador to China Nicholas Burns recently said Beijing is signaling that its “zero-COVID“ policy will persist into 2023.  The ambassador added that US businesses are reluctant to invest in China until the current policy is eased.  Many US businesspeople have or are planning to leave China, although he said the China market is too important for foreign companies to leave entirely.  
  • On 27 June, Beijing Party Secretary Cai Qi, a close ally of Xi, was cited in official media as saying that “zero-COVID” will continue for another five years.  However, this remark was later deleted online, after it caused great consternation on social media.  Chinese official media is tightly controlled, and it is unlikely that the phrase “next five years” was published by mistake. 
  • On June 15, China’s Cyberspace Administration, which oversees online censorship, published an article citing a 1953 speech by Mao Zedong to justify China’s COVID policy.  In the speech, Mao said that although China’s entry into the Korean war led to massive losses, in the long run it was in China’s interest.  This heavy-handed defense of “zero-Covid” betrays a siege mentality that has characterized much of Xi’s approach to COVID.    

A prolonged “zero-Covid” posture is likely to further disrupt the global supply chain.  Although exports from China increased in May, a future uptick in COVID cases is likely to lead to more lockdowns and supply chain problems.  On 28 June, a Chinese health official warned of future COVID surges, as the more contagious Omicron sub-variants BA.4 and BA.5 come to China. 

  • Lockdowns and restrictions have severely affected China’s trucking industry, which is responsible for moving three quarters of China’s freight.  According to data from a Chinese logistics company, as of late May 2022, about half of China’s truck operators had not even reached 30 percent of their capacity in 2021. 
  • Furthermore, US importers have expressed concerns that the Uyghur Forced Labor Prevention Act (UFLPA)—which went into effect on June 21—will worsen supply chain disruptions.  Products that are made in or contain components or materials from China’s Xinjiang Uyghur Autonomous Region will be subject to more scrutiny by US customs even if they are not made by known entities that use forced labor.  Xinjiang is a major producer of polysilicon, apparel, tomatoes, and cotton. 

Although China’s economic performance in May was better than expected, high unemployment and weak consumer spending remain major obstacles to China’s economic recovery.  A prolonged economic slump in China will negatively impact the broader global economy; in the years following the 2008 financial crisis, strong Chinese economic growth helped cushion some of the impact of the global slowdown.  

  • Premier Li Keqiang in late June said that China’s economy has recovered as a whole, but unemployment and weak consumer spending are two major concerns.  He called the task of stabilizing employment “arduous.”  China’s unemployment rate in 31 major cities reached a record high of 6.9 percent in May, according to survey data going back to at least 2018.  
  • Retail sales fell by 6.7 percent in May from a year ago, reflecting the lingering effects of lockdowns.  COVID restrictions have also sharply reduced Chinese tourist travel, which in 2019 made up almost 20% of all international tourist spending.  China currently restricts its own citizens from non-essential travels overseas.  

Subtle signals in official Chinese media suggest that there is some unease with Xi’s insistence on “zero-COVID”—and the social control that comes with it—at the expense of economic growth, but his detractors are not strong enough to make him reverse course.  Although disagreements are kept behind closed doors, experts and observers have commented that senior economic officials—such as Premier Li and even Xi’s ally Vice Premier Liu He—are concerned about Xi’s handling of the economy.  There are, however, no indications of a unified opposition movement against Xi, despite Western media speculations that the premier and allies of former leader Jiang Zemin are challenging Xi.  

  • One indicator of Xi’s continued political strength is his ability to put his allies in key positions ahead of the Party Congress in the fall.  For example, his former chief of staff Li Shulei was recently promoted to Executive Deputy Director of the party’s powerful Propaganda Department.  Li will probably be promoted to Director soon, which will qualify him for the Politburo—an organization comprising 25 of China’s most senior leaders. 
  • Shanghai Party Secretary Li Qiang—a close Xi ally—was reelected to his current position on 28 June by party delegates, despite popular discontent toward his handling of the massive lockdown in Shanghai.