China’s “Dynamic Zero-COVID” Policy Weighs on a Weak Global Economy

Introduction

The long lockdown in Shanghai may finally be nearing an end. Stores in parts of the city have been permitted to gradually reopen, and limited public transportation has resumed (Sh.news.cn, May 23; Xinhua, May 11) Nevertheless, for much of the city the lockdown drags on, as do lockdowns in other urban centers. Furthermore, China appears unlikely to pivot away from its “dynamic Zero-COVID” policies anytime in the foreseeable future. At a Politburo Standing Committee meeting earlier this month, General Secretary Xi Jinping reaffirmed his support for the current epidemic prevention approach. He stated that “practice has proven our [epidemic] prevention and control policies can stand the test of history, and our prevention and control measures are scientific and effective. We have won the battle to defend Wuhan, and we will certainly be able to win the battle to defend Shanghai” (People’s Daily, May 6).

Images of lockdowns and empty cities in China are surely not as worrisome for Western observers as the war in Ukraine, but the negative consequences of  Beijing’s continued adherence to its “dynamic Zero-COVID” policies might ultimately be more detrimental to the global economy than Russia’s invasion of Ukraine. Two reasons exist for this. The first and most obvious is that the Chinese economy is about ten times larger than Russia’s economy and many more times the size of that of Ukraine. Secondly, Chinese policymakers, long renowned for their pragmatism, are increasingly obsessed with controlling the virus, to the point of prioritizing this objective above what has always been considered China’s top priority in the reform era—achieving high economic growth.

A Major Economic Hit

Over the course of this year, the “dynamic Zero-COVID” policy has led several large  cities to implement rigid human mobility restrictions to curb disease transmission. In late March, these cities accounted for 40 percent of China’s gross domestic product (GDP). Chief among the cities that have been subject to extended, draconian lockdowns is Shanghai, which is China’s most important city in terms of its contributions to the national GDP (China Securities Network, March 31). Accounting for nearly 5 percent of China’s GDP and holding the flag of the nation’s most important onshore financial center, Shanghai has endured two months of strict lockdown. China’s consumption declined sharply in March with retail sales falling 3.5 percent and restaurant sales plummeting 18 percent, a drop off which was largely due to the stringent epidemic prevention measures  (National Bureau of Statistics, April 18).

Local authorities have tried to create closed loops to ensure the lockdown does not affect Shanghai’s manufacturing capacity, but many factories have been unable to operate and forced to temporarily stop their production lines  (People’s Daily, April 27). Beyond the difficulty of keeping their workers within loop, the logistics of receiving production input and transporting final products from the factory to market has become a nightmare. According to local GPS information, around half of China’s highways appear closed and air cargo and ports are operating inefficiently due to mobility restrictions and cross-border quarantine rules. In April, the manufacturing Purchasing Managers Index (PMI) dropped to 47.4 percent, a decrease of 2.1 percent from March and the lowest number in the past year (National Bureau of Statistics, April 30). Based on this data, the Chinese economy is severely weak in both the service sector and the manufacturing sector, the latter of which has entered recession territory.

Global Consequences

The consequences of China’s rapid economic slowdown on the rest of the world are already noticeable. In March, China’s imports unexpectedly collapsed- falling 15% from the previous months (South China Morning Post (SCMP), April 13). The decline in imports reflects the detrimental impact of quarantine rules that have recently been imposed on foreign merchandise, which has added another hurdle for goods entering China. As if this were not problematic enough, restrictions on manufacturing are clearly a major shock for the global economy, as China exports as much as one-third of the world’s intermediate goods. Transportation problems, which stem from cross-border mobility restrictions and high shipping costs, are also likely to persist, and as a result,  global supply chains will continue to experience significant disruption.

Beyond the reduction in domestic mobility, since the COVID-19 pandemic started in late January 2020, China’s borders have been largely closed off to the world (SCMP, May 13). This situation has an important—but unfortunately negative—bearing on the global economy. An obvious immediate consequence is the plummeting number of physical people-to-people exchanges between China and the rest of world, including both tourists and business exchanges.

Curbs on Chinese citizens traveling abroad have wreaked havoc on the economies of several countries that were major tourist destinations for Chinese travelers before the pandemic. For example, this month, the Thai baht hit a five-year low against the dollar as China further tightened curbs on overseas travel, which has had a devastating impact on Thailand’s tourism industry (Nikkei Asia, May 14). The slowdown in business exchanges is one of the main reasons why China’s outward foreign direct investment has stalled since the pandemic started. This is particularly relevant for emerging economies with large financing needs, since they rely on external capital to build their infrastructure and upgrade their industrial capacity.

The second unintended consequence of China’s closed borders is increasing lack of mutual understanding between China and the rest of the world of recent developments. The much larger number of COVID cases in most countries compared with China has fostered a strong impression among Chinese citizens of security at home and risk abroad, which has contributed to waning interest in traveling to the rest of the world.

This perception obviously does not bode well for future scientific or business collaboration between China and the broader international community, although it is difficult to measure the immediate impact of this on the global economy. The current Russia-Ukraine conflict and its devastating consequences offer a relevant example of how strict border restrictions can promote dystopian views of the outside world.

Conclusion

The dynamic zero-COVID policy is likely to further damage the Chinese economy, especially with lockdowns looking set to continue for the foreseeable future. The global economy is likely to experience severe consequences due to China’s continued adherence to zero-COVID policy as well. Beyond the reduced demand for imports from China, an even more immediate effect is continued inflation, given the world’s dependence on Chinese production of intermediate goods. Finally, the lack of exchanges between China and the rest of the world for close to two and a half years constitutes an additional force for deglobalization, acting as a driver of further decoupling between China and West.

Alicia García-Herrero is a Senior Research Fellow at Bruegel and Adjunct Professor at Hong Kong University of Science and Technology. She is also Chief Economist for Asia Pacific at NATIXIS and a non-resident fellow at the East Asia Institute of the National University of Singapore.