China’s COVID-19 lockdowns drag down economy and cause ripple effects around world

Strict COVID-19 lockdowns in Shanghai and other cities across China are dragging down the world’s second-largest economy, threatening key growth targets and causing knock-on effects internationally at a time of worldwide instability.

Parts of Shanghai have been closed for over two weeks now, with residents unable to leave their homes for any reason. Many have reported running out of food and other goods amid a supply chain crunch, as well as struggling to access non-COVID medical care, including for life-threatening conditions.

A handful of neighbourhoods began easing restrictions this week, but the majority of the city’s 26 million people remain locked down. On Wednesday, Shanghai reported 26,330 new infections, a daily record, as officials warned community spread has still not been curbed despite the strict controls.

“There is a strong sense of uncertainty throughout the city, and it’s fuelled by supply shortages, endless lockdowns, and a really big fear of being sent to one of the central quarantine camps,” said Bettina Shon-Behanzin, Shanghai chair of the European Union Chamber of Commerce in China.

While Shanghai has received the most attention due to the high number of cases being reported there, it is not alone in facing restrictions. A recent analysis by financial research firm Gavekal found that of the top 100 Chinese cities by GDP, all but 13 had imposed some sort of new quarantine regulations, and “the intensity is increasing.”

The vast majority of goods in China are transported overland, and new controls are causing chaos, with truck drivers facing frequent checks, unpredictable testing requirements, and the ever present threat of quarantine.

“The prolonged lockdown in Shanghai plus local authority-ordered highway controls in a number of provinces are severely disrupting logistics in China,” Tommy Wu, a Hong Kong-based analyst for Oxford Economists, wrote in a note Wednesday.

“We believe that even if highway controls are lifted in the coming weeks, the disruption will take some time to clear and affect industrial production and exports in April and May – if not longer.”

On Monday, China’s State Council issued a directive prohibiting road blocks and calling for “more efficient COVID-19 screening along transportation routes.” But despite claims in government-run media that this had helped alleviate supply crunches, there were still widespread reports of long delays caused by COVID checks and drivers unwilling to travel to certain areas for fear of being quarantined.

Over the past two years, many provincial and local officials blamed for mishandling COVID outbreaks have lost their jobs, and with Beijing still advocating a strict “dynamic zero” approach nationwide, there are strong incentives for erring on the side of extra controls, regardless of the recent guidance.

Nick Marro, lead analyst for global trade at the Economist Intelligence Unit, said that Beijing has stressed “this entire time that at the end of the day what wins out is healthcare policy, more than economic policy or anything else.”

Last month, China set a modest annual growth target of “around 5.5 per cent,” but most analysts expect Beijing will struggle to hit that. On Wednesday, China reported a 10.7 per cent year-on-year increase in foreign trade in the first quarter, but this is likely not reflective of recent disruptions, which began in late March.

Top Chinese officials are looking increasingly concerned, with Premier Li Keqiang warning this week that “downward economic pressure has further mounted.” He urged officials to “strengthen the sense of urgency” when it came to ensuring economic stability, expediting the reduction of taxes and fees and pumping government money into infrastructure, particularly for construction projects, a favoured tool of Beijing for driving economic growth.

Mr. Marro said “we’re going to see a continued expansion of the state sector in a way that will have consequences for productivity, debt serving, the market-based allocation of resources, all these things China has being trying to deal with for decades but keeps get distracted from by other policy priorities.”

Current measures, particularly the lockdown in Shanghai — home to the world’s busiest container port — are also exacerbating an already weakened global economy. Officials have endeavoured to keep port operations functioning as usual, and some factories have had workers bunk down on-site, but it’s unclear how long these measures can last, with some businesses such as Apple and Tesla already pausing operations in Shanghai.

“We hear more and more that some workers aren’t volunteering, since there is no clear end to the lockdowns and they don’t want to live on site for weeks and sleep in the factory or in an office,” Ms. Shon-Behanzin, the European Chamber chair, told a media roundtable this week.

Beyond supply chain issues and economic uncertainty, any slowdown in the domestic Chinese economy also “has consequences for a lot of markets in Asia” and further afield, Mr. Marro said, given the size of China’s consumer base.

For the most part, despite the growing economic costs, Beijing has shown no inclination of shifting away from a strict containment approach to COVID, leaving the country increasingly isolated internationally and sparking frustration even from a population that was previously broadly supportive of such measures.

In Shanghai, numerous videos have gone viral of people arguing with officials, while some residents trapped in their apartments have taken to shouting from their windows and balconies in frustration. One neighbourhood even deployed a drone in an apparent attempt to dissuade such protests, playing a recorded message instructing residents to “control your soul’s desire for freedom” and go back inside.

But while there is anger and frustration among those feeling the brunt of the restrictions, “the great mass of people in China support zero COVID,” said Frank Tsai, Shanghai-based founder of consulting firm China Crossroads.

He pointed out that Beijing’s approach has been hugely successful in containing the virus and keeping deaths minimal, while enabling much of the country to operate as normal since mid-2020, albeit with restrictions on travel, particularly internationally.

“Most of China has never been locked down, and so for them the drawbacks of this policy are still only theoretical,” Mr. Tsai said.

Reporting on lockdowns and supply chain issues is also limited in China by strict media controls. State-run outlets frequently inveigh against adopting measures more in line with the rest of the world, comparing such approaches to “lying flat” and allowing the virus to run rampant.

Nor is the government’s fear of easing up unfounded. Currently, about 90 per cent of China is vaccinated, but this is heavily skewed toward younger people, especially when it comes to getting a booster shot, vital to protecting against Omicron.

Only around half of those over 60 have received three jabs, leaving them vulnerable. Hong Kong has recently shown what happens when Omicron rages through a territory with poor vaccination rates, and a similar situation in China could see tens of thousands of deaths and a severe strain on the country’s health system, potentially to the point of collapse.

The risk of such an eventuality in a country where the government places an absolute premium on stability — and has made COVID containment a key point of pride — is likely considered far too costly, no matter the economic damage caused by the current approach.

With a report from Alexandra Li

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