Tag Archives: Covid-19

US Businesses In China Face Testing Times

THE LATEST ANNUAL SURVEY survey of its members by the US-China Business Council shows less optimism among US companies operating in China about the business outlook for the country than at any time since the Council started asking. 

Barely half of the 117 firms surveyed expressed optimism about the business outlook for the next five years, a record low. One in five said they were pessimistic.

Two points to note: the respondents to the Council’s survey tended to be their members that are large, US multinationals that have operated in China for more than 20 years and thus are committed to the China market for the long-term and have an understanding of its vagaries — ‘in China, for China’ in the argot.

Second, the survey was fielded before the visit of US House Speaker Nancy Pelosi to Taiwan, which prompted a sufficiently belligerent reaction from Beijing that many US-based chief executives started reviewing their China strategies. The timing may explain why zero-Covid pipped US-China tensions as companies’ top concerns. The survey’s key takeaways:

• China’s COVID-19 policies are the top challenge: China’s COVID-19 strategy now poses the top challenge to US companies, displacing US-China relations, which ranked as the top concern for four consecutive years. The looming possibility that companies will again be forced to partially halt operations due to lockdowns and the impacts of local controls on consumer demand have undermined confidence in the business environment.

• Bilateral tensions continue to hurt American companies: Respondents report record-high concern with US-China relations, which continue to deteriorate. Geopolitical pressures are bleeding into the commercial realm, leaving companies—which depend on a stable and predictable trade environment—in increasingly challenging positions. Chinese customers’ real and perceived concerns about ongoing access to US technology due to US-China tensions continue to threaten US companies’ competitiveness in the market, an alarming trend that could be difficult to reverse.

• Little progress on long-standing issues as new barriers emerge: Significant market access barriers remain, even as China assures foreign companies that they will receive equal treatment. Intellectual property (IP) protection has seen limited improvement. Chinese economic planners have expanded industrial policies to bolster Chinese companies, and localization requirements to qualify for state-affiliated procurement are increasing. At the same time, new Chinese data security and privacy rules threaten to disproportionately increase costs for multinational companies.

• Trajectory of commercial relations at another inflection point: The difficult operating and geopolitical environment has impacted company performance, leading to record levels of pessimism and affecting companies’ decisions about their supply chains and future investments. At the same time, companies overwhelmingly remain profitable in China and they continue to recognize China’s importance to their global competitiveness. Whether business sentiment and the pace of future investment rebound or continue to falter will depend on decisions by US and Chinese policymakers in the coming months and years.

Zero-Covid policies, regulatory crackdowns to align business with national goals and tensions with the United States will likely continue for the foreseeable future and have a long-term impact on foreign companies operating in China. 

Perhaps most damagingly for firms’ confidence is that they underline the secondary position to the state to which business is relegated. For a handful of companies, that will lead to exiting the market in whole or part, as companies that source products or raw materials, rather than sell into the Chinese market, are starting to do. 

However, for those unwilling to give up on the markets offered by the world’s second-largest economy, large enough to segregate their global supply chains, and with the means and will to do so, it will probably mean hunkering down for several uncomfortable and testing years.

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IMF Cuts Its China Growth Forecasts Sharply

Screenshot of cover of IMF' July 2022 update to its World Economic Outlook

THE INTERNATIONAL MONETARY FUND has sharply cut its forecast for China’s growth this year and next as part of a gloomy mid-year update to its World Economic Outlook.

The Fund is now expecting China’s economy to grow 3.3% this year and 4.6% next, which is 1.1 percentage points and half a percentage point lower, respectively, from its April forecast.

The IMF cites the lockdowns to contain Covid-19 and the deepening real estate crisis, causing a sharper-than-expected slow down in the first half of the year, as the reasons it lowered its forecast. It warns that both could worsen, further reducing growth, while geopolitical fragmentation could impede global trade and cooperation.

The slowdown has already added to global supply chain disruptions.

COVID-19 outbreaks and mobility restrictions as part of the authorities’ zero-COVID strategy have disrupted economic activity widely and severely. Shanghai, a major global supply chain hub, entered a strict lockdown in April 2022, forcing citywide economic activity to halt for about eight weeks. In the second quarter, real GDP contracted significantly by 2.6 percent on a sequential basis, driven by lower consumption—the sharpest decline since the first quarter of 2020, at the onset of the pandemic, when it declined by 10.3 percent. Since then, more contagious variants have driven a worrisome surge in COVID-19 cases. The worsening crisis in China’s property sector is also dragging down sales and real estate investment. The slowdown in China has global consequences: lockdowns added to global supply chain disruptions and the decline in domestic spending are reducing demand for goods and services from China’s trade partners.

Chart showing impact of Covid-19 outbreaks in China on global supply chains. Source: IMF July 2022 update to World Economic Outlook

Growth of 3.3% would be China’s slowest growth in four decades, excluding the initial COVID-19 crisis in 2020. The official target of above 5% growth seems increasingly out of reach regardless of the infrastructure spending stimulus being poured into the economy.

Higher energy and food prices because of the war in Ukraine are external headwinds beyond Beijing’s control, as is policy tightening by the major central banks to tame inflation. What is in Beijing’s remit, a recalibration of the zero Covid strategy to reduce growth trade-offs, will be minimal at most.

Downside risks include larger-scale outbreaks of more contagious virus variants that trigger further widespread lockdowns under the zero-COVID strategy. In addition, delayed price and balance sheet adjustments in the property sector could cause a sudden, wider crisis or a protracted adjustment with broader macro-financial spillovers. A sustained slowdown in China would have strong global spillovers, whose nature will depend on the balance of both supply and demand factors. For example, further tightening of supply bottlenecks could cause higher consumer goods prices worldwide, but lower demand might ease commodity pressures and intermediate goods inflation.

Overall, the IMF expects slower growth and trade and higher inflation globally. It now puts global growth at 3.2% this year and 2.9% next, although it acknowledges that the risks are ‘overwhelmingly tilted’ to the downside. Its ‘plausible alternative scenario’, in which risks materialize and global growth slows to 2.6% this year and 2.0% in 2023, looks as plausible as its baseline scenario.

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Vaccination Will Not Eradicate China’s Zero Covid Policy

Map showing biweekly confirmed COVID-19 deaths per million people, Jul 23,
2022; Source: Our World in Data

PRESIDENT XI JINPING is far from the first world leader to have a well-publicised exemplary vaccination against Covid-19.

Yet, the remarks by Zeng Yixin, deputy head of the National Health Commission, that the top leadership have all been vaccinated with domestically produced Covid vaccines is notable on several counts.

First, information connected to senior officials’ health is customarily tightly held.

Secondly, Xi’s doubling down on ‘zero-Covid’ is China’s signature response to the pandemic in contrast to most of the world’s acceptance of endemic Covid, trusting a vaccinated population will keep severe infection and mortalities at low rates. Attempting to eradicate Covid through the zero-Covid policy carries high costs, socially from the mass testing, strict quarantine rules and local lockdowns, and economically from the disruption to commerce and manufacturing lockdowns cause.

China’s Covid mortality rate is minuscule compared to other countries, but, until recently, so were its vaccination rates, especially among the vulnerable elderly. These are now officially up to 90% (share of the population that has been double jabbed). However, Sinovac, China’s inactivated-virus vaccine, does not reach the same level of effectiveness as the mRNA vaccines used in the West until three doses, which may explain the timing of Zeng’s announcement about Xi. China’s mRNA vaccine, ArCoV, is in trials.

However, it will reinforce speculation in the West that Beijing is preparing to drop its zero-Covid policy. That seems unlikely if only because Xi’s endorsement has made the policy a political imperative rather than an issue of public health.

The Party has also been using low Covid mortality and case rates as evidence that China’s political system is superior to liberal democracy, a key pillar of its argument for its legitimacy. It would take near-universal vaccination with an mRNA vaccine to reduce mortality and severe infection to sustain that narrative in place of zero Covid.

That is many, many months off. Cai Qi, the Beijing Party Secretary, recently said his city would uphold zero Covid for the next five years.

Arguing that vaccination levels and treatment capabilities have reached a level at which it was no longer necessary to eliminate the virus through zero Covid would also be challenging. The Party’s propagandists would need to find a uniquely Chinese spin on a policy widely adopted by other countries.

Minimising the economic damage of zero Covid is gaining policy attention, especially as headwinds increasingly batter the economy. Dynamic zero-Covid means eradicating new local outbreaks by removing infected cases to isolation centres. Lockdowns are becoming more targeted and quarantine periods shorter. The capital, for example, has managed to avoid the lengthy citywide lockdown that afflicted Shanghai from late March to early June.

However, zero-Covid will remain in place for at least the rest of this year, well into next, and, potentially, well beyond.

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Zero-Covid Weighs Heavily On China’s GDP Growth

CHINA’S ECONOMY JUST about eked out positive growth in the second quarter compared to a year earlier, but the contraction from the first quarter tells the story of the economic impact of the zero-Covid policy on businesses and consumers, especially the lengthy lockdown in Shanghai.

Gross domestic product grew by 0.4% in April-June year-on-year and contracted by 2.6% compared to January-March, the Bureau of National Statistics announced today.

Shanghai’s economy shrank 13.7% year-on-year in the second quarter and Beijing’s 2.9%.

The national year-on-year number was the smallest since the data series began in 1992, excluding the 6.9% contraction in the first quarter of 2020 due to the initial COVID shock.

The recent high-frequency indicators, particularly for retail sales, suggest that the economy is starting to bounce back.

However, outbreaks of the highly contagious Omicron variants forcing more full or partial lockdowns remain a downside risk to recovery, given the continuing commitment to the zero-Covid policy.

The beleaguered property development sector remains a drag on growth, and the worsening outlook for the global economy is a further headwind.

The official target of 5.5% growth for the full year continues to look beyond reach, with an unrealistic 10% growth needed in the second half to achieve it. Further stimulus measures are likely, although authorities are limited in what they can do that will not stoke inflation (subdued by world levels) or worsen long-term debt risks.

Bloomberg calculates that $1.1 trillion has been earmarked for infrastructure spending, suggesting at best an extended pause to the effort to deleverage the economy.

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Mini-Lockdowns Become China’s New Normal

Chart showing 7-day trailing average of confirmed new Covid-19 cases in China, June 1-July 10. Source: Our World in Data.

THE LATEST VARIANTS of Covid-19 are posing new challenges to China’s zero-Covid policy and raising concerns that another round of lockdowns is imminent.

According to authorities, Macau has closed its 30 casinos and other non-essential businesses for at least a week after recording more than 1,500 Covid cases since the middle of June. Some 19,000 people are in mandatory quarantine.

Several casinos have been converted into temporary medical facilities, as Macau has only one public hospital.

While not formally locked down citywide, Macau, in practice, is closed.

Meanwhile, Shanghai authorities announced on Sunday that the city had identified its first case of the Omicron BA.5.2.1 mutation and that residents in several Shanghai districts are undergoing three days of double rounds of Covid testing. Mass testing in multiple districts also took place last week.

Mass testing has become the first line of defence to keep infection levels in check, with a negative test required to travel on public transport or enter certain places and those testing positive being put into mandatory quarantine.

China’s first case of the highly contagious BA.5 variant was discovered in the city in mid-May. Authorities said it was brought into the country by a passenger on a flight from Uganda. It has since been detected as far away as Xian and Dalian in Liaoning province.

Shanghai only emerged from a punishing near two-month lockdown in early June. Central government officials have said that new curbs should be targeted to reduce economic damage, but there is no indication that the huge cost of closing Shanghai has changed Beijing’s commitment to its zero-Covid. strategy.

Elsewhere, mass testing is also being conducted in several districts in Guangzhou and Xining in Qinghai province. Nanchang in Jiangxi province closed places of entertainment on Saturday.

Temporary curbs, including shutting entertainment and cultural venues, have also been imposed in Danzhou and Haikou in Hainan province and Lanzhou in Gansu. In all, some 6 million people are affected.

The town of Qinyang in Henan almost wholly locked down its nearly 700,000 residents from Sunday. One person from each household is allowed out every two days to get groceries.

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China Faces Risk Of New Round Of Covid Lockdowns

Chart showing 7-day moving average of confirmed new Covid-19 cases in China, Jun 3-July 6, 2002. Source: Our World in Data

NEW COVID-19 case numbers are rising in various cities across China. The seven-day trailing average has increased to more than 300 from a low of 25 in late June.

Authorities are imposing restrictions on business operations (Xian) and public spaces (Beijing) and putting tens of millions of people under social distancing restrictions.

Earlier this week, the Japanese bank Nomura estimated that 114 million people were under full or partial lockdowns, including in Shanghai, which has only recently emerged from a punishing complete lockdown.

With President Xi Jinping repeatedly reaffirming China’s commitment to its zero-Covid policy, can more stringent lockdowns be far behind?

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The Unhealthy Use Of China’s Health Codes App

THE PUNISHMENT OF five local officials in Henan province for using a COVID-19 quarantine enforcement app to prevent protesters from travelling shows the capacity for digital repression and Beijing’s desire that local officials’ use of it does not get out of hand.

The punishments of two officials for ordering the tampering with the codes and three for carrying it out followed an investigation by the local discipline and supervision commission in Henan’s provincial capital, Zhengzhou.

Earlier this month, hundreds of people who had lost savings in a Ponzi scam in Henan found their health codes on the smartphone apps used to enforce COVID-19 quarantines suddenly turned red, despite testing negative for COVID-19.

A red code prevents access to public transport, hotels and other facilities. This prevented the citizens from travelling back to Henan to access their frozen bank accounts and petition authorities for redress.

The scam had already been widely shared on social media, and the apps turning red outraged social media users already weary from lockdowns. Posts about family members of depositors being placed in mandatory quarantine after their relative’s health code turned red further fuelled the anger at health codes being turned into what was called certificates of good citizenship.

The public relations damage at a time when Beijing was doubling down on its zero Covid policy soon had state media condemning the alleged abuses by local officials. China Daily described tampering with health codes as ‘ one of the worst forms of abuse of power’.

China’s new digital privacy regime limits the independent misuse of digital technology by China’s vast bureaucracy. However, while central leadership will not impose any limits on its ability to use technology for political ends, it is demonstrating that it will discipline lower-level officials if they do so for their own ends, even if that is a misguided attempt to maintain local public order.

However, the more significant concern remains that the health code system provides higher-level authorities with a repressive tool to track and quarantine arbitrarily any opponent or critic.

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World Bank Lowers China Growth Forecast

The World Bank's Global Economic Prospects, June 2022 update cover page

THE WORLD BANK has cut back its forecast for China’s economic growth this year by 0.8 of a percentage point to 4.3%.

The revision to its forecast in January comes in the latest update to its Global Economic Prospects report.

The Bank forecasts 5.2% growth next year and 5.1% in 2024. Its revision for 2023 is only a 0.1 of a percentage point reduction.

The World Bank is usually among the more optimistic forecasters of China’s GDP growth. A projection for this year so below the official target of 5.5% growth underlines the severity of the economic headwinds China faces; not that many expect the official target to be hit.

The Bank expects the global economy to slow to 2.9% growth this year and not rebound next.

Following more than two years of pandemic, spillovers from the Russian Federation’s invasion of Ukraine …. is leading to high commodity prices, adding to supply disruptions, increasing food insecurity and poverty, exacerbating inflation, contributing to tighter financial conditions, magnifying financial vulnerability, and heightening policy uncertainty… Moreover, the outlook is subject to various downside risks, including intensifying geopolitical tensions, growing stagflationary headwinds, rising financial instability, continuing supply strains, and worsening food insecurity.

On China, the Bank says that strict lockdowns to control Covid-19 outbreaks have been the main reason for slowing growth. Consumer spending has been particularly subdued, and trade and manufacturing investment have lost momentum, exacerbated by supply disruptions and the negative impact of the war in Ukraine.

The pandemic has also reversed the recovery of the real estate investment seen at the start of the year.

In response, authorities have already relaxed some property and financial regulations and eased fiscal and monetary policy. However, the Bank expects more stimulus measures to mitigate the impact of the lingering pandemic and worsening terms of trade.

The Bank is uncertain about the size, composition and effectiveness of policy stimulus, noting that increased investment in the stock of public infrastructure — the tried and trusted measure authorities are most likely to turn to — faces diminishing returns.

The outlook is subject to significant risks.

Repeated COVID-19 outbreaks and strict lockdowns across major cities would curtail the recovery of consumption and services activity, disrupt supply chains, and weigh on investor confidence. In addition, renewed stress in the housing sector would further reduce real estate investment and government revenues, affect the solvency of developers and local government financing vehicles, and weigh on house prices and consumer spending.

It is Covid-19 that hangs heaviest over the outlook. The Bank estimates that a resurgence could reduce China’s growth by a further 0.5 of a percentage point in 2022 and 0.3 of a percentage point in 2023.

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Shanghai Reopening Would Be China’s Most Powerful Stimulus Measure

Shanghai waterfront skyline seen in an archive 2015 photograph

THE EASING OF the lockdown in Shanghai on June 1 may prove the most crucial stimulus measure that authorities take to revive China’s economy and get it anywhere near the official target of 5.5% GDP growth this year.

The more-than-two-month-long lockdown has not been lifted entirely, though there is no staggering of the easing. Most people can move more freely around the city, provided they can show a green health code on their smartphone. Public transport within the city has restarted. Crucially, many businesses are reopening their doors, with in-person customers having to show a negative Covid test within the previous month 72 hours.

However, 10% of the population of 25 million residents in high-risk areas will remain confined at home. Confirmed Covid cases and close contacts still face quarantine or hospitalisation. A localised outbreak risks the reimposition of a neighbourhood lockdown. Residents returning from trips outside the city still need to quarantine. Schooling remains remote, and places of mass entertainment remain shut.

Nonetheless, word reaches this Bystander that the mood in the city is far more one of celebration and relief than the noble forbearing that official media portrays. That, in itself, is likely sending a message to city officials, who have not emerged from the lockdown covered in glory.

Residents have been angry at the strictness of the measures, city officials’ ineptness in enforcing them, leading to, for example, food shortages, and the fact that much of the financial aid has gone to businesses and factories, not to households.

The economic cost has been tremendous. An academic paper published earlier this year gives a sense of the likely scale of the cost — full percentage points of GDP. Shanghai is the country’s biggest and most affluent city and its financial, commercial and international business hub. It accounts for 3.8% of China’s GDP and 10.4% of China’s trade with the rest of the world (2021 data).

It will likely take months for the city’s economy to be operating at anything like normal again, not least because supply chains need to stabilise first.

The manner of the easing of the lockdown allows both President Xi Jinping and Premier Li Keqiang to maintain their positions on the need for the zero-Covid policy and the need to reopen an economy facing multiple headwinds, respectively.

Earlier this week, government departments started to flesh out the details of the 33-point stimulus package that Li announced on May 23. The measures are broad-ranging, including tax cuts, business subsidies and loans, and infrastructure investment. As important as staving off a potential recession, the stimulus aims to stabilise employment, the government’s short-term priority.

The measures also included initiatives such as streamlined customs and immigration intended to bolster the confidence of foreign firms manufacturing in China who might be thinking this is a time to look elsewhere.

The critical but beleaguered property sector has had separate support measures, including interest rate cuts.

The economic impact of getting Shanghai back to normal business would mean more to the national economy than all of the above.

Shanghai’s lockdown has been the most disruptive but only one of several in major cities that have provided a stark reminder of China’s willingness to throw the economy into turmoil when political priorities demand it.

As Li has repeatedly warned, the official target of 5.5% GDP growth is undoubtedly out of reach. Much has been speculated about a rift between Xi and Li ahead of the autumn’s Party Congress, the truth of which is probably impossible to know. Sometimes, economic tumult is just economic tumult.

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No Going Back For China On Zero-Covid

Chart showing daily new confirmed COVID-19 cases in China, 7-day rolling average. Source: Our World in Data

EVEN THOUGH NEW Covid-19 infections have peaked, Shanghai city authorities are imposing stricter control measures, an indication of the intensifying political dimension to the zero-Covid policy on which President Xi Jinping yet again pinned his personal colours at the Politburo Standing Committee on May 6.

Shanghai is already under what is now more than a month’s-long lockdown that has seen deaths, caused economic disruption and kindled social unrest amid localised food shortages and disgruntlement about city authorities’ management of the situation.

More mass testing and stricter enforcement of mandatory quarantine for those testing positive or who have co-residents, not just family or close neighbours who test positive are on the way. Residents have reportedly received notices of the imposition of ‘quiet periods’ of three to seven days in which they will not be allowed outside and non-essential deliveries will be halted.

Beijing, too, is extending quarantine measures and making its lockdowns less ‘lite’ in a bid to avoid the capital becoming a second front in ‘the battle for Shanghai’.

As this Bystander has noted before, the top leadership is in a bind. Under- and ineffective vaccination has left it with little option but to persist with trying to achieve zero-Covid. Treating the pandemic as endemic now would likely trigger a wave of deaths that would undermine the narrative of China, unlike the heartless West, putting the lives of its citizens above economic considerations.

Yet the longer it persists with zero-Covid, the less choice it has but to continue it. Politically, Xi cannot make a U-turn, especially with a critical Party Congress coming up in the autumn. The messaging by state media and censorship of social media will negate public criticism of Xi, while local officials will be under pressure to fall into line.

The same may hold less true in elite circles, even if criticism remains muted. Few if any will take the gamble of speaking out loudly against Xi now, cognizant that his power may be far greater after the Party Congress.

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