Xi Jinping's relentless “zero COVID” policy threatens China's growth

China's “Covid Zero” policy threatens to derail the country's economic progress goals, weighed down by problems in supply chains, port delays and Shanghai's lockdown, analysts said.

Growth in the second world economy slowed in the second quarter of 2021 due to problems in the housing market and regulatory controls in certain sectors, leading leaders to set a 5.5% Gross Domestic Product progress by 2022, the lowest target in decades.

But analysts told AFP that this goal may be difficult to achieve due to lockdown orders that are paralyzing production and impacting consumption in several key cities across the country.

Experts from twelve financial institutions estimated an average growth of 5% for the whole year and 4.3% in the first quarter, slightly above the 4% recorded in the previous quarter.

The official data for the first three months will be released on Monday.

“China's economy got off to a good start in January and February with fewer energy constraints, a recovery in domestic demand (...), fiscal stimulus and resilient exports,” explains Gene Ma, director of research in China for the Institute of International Finance. But the increase in coronavirus infections in March and the lockdowns decreed “have severely disrupted supply chains and industrial activities,” he adds.

Analysts predict that the outbreak, especially virulent in the economic capital Shanghai, will reverse earnings at the beginning of the year.

Automakers warned this week of serious disruptions in supply chains and the possibility of completely halting production if lockdown continued in Shanghai.

Prime Minister Li Keqiang said this week that the State will intervene to help sectors affected by the pandemic with tools such as cutting reserve ratios required of banks.

Other large cities affected by the covid outbreaks include the large technology center of Shenzhen, in the south, which was in total confinement for almost a week in March.

“The impact on retail sales may be greater, because restoration — about 10% of retail sales — was temporarily suspended in some provinces,” Goldman Sachs said in a recent report.

Economists predict that in April there will be greater consequences of the lockdown that will make growth more difficult.

With infections in dozens of cities, Beijing has reiterated its adherence to the “Covid Zero” strategy, which involves eradicating any outbreak with mass lockdowns and tests, isolation from positive ones and strong border restrictions.

China's draconian strategy against the virus is under extreme pressure as the virus spreads across the country, with another outbreak in the northeast. Until March, China had managed to keep the number of daily cases in two or three digits, with hard localized closures, massive testing and travel restrictions. But last week, the number of daily infections reached unseen rates since mid-February 2020.

This has led to a limitation of movements for almost two weeks in Shanghai, the country's financial capital that records tens of thousands of cases every day, most of them asymptomatic.

The city of 25 million inhabitants is home to the busiest freight port in the world. Operations are still ongoing, but restrictions on intercity travel and a shortage of truck drivers hamper the transit of goods. The flow of freight vehicles on motorways “has sharply weakened” since the beginning of April, Capital Economics economist Julian Evans-Pritchard said in a recent report.

The Shanghai authorities were criticized for allowing the increase in cases and failing to guarantee food supplies to the population.

“Shanghai is a lesson, and local governments in other parts of China may become more sensitive to outbreaks,” Tommy Xie, head of research in China at OCBC, told AFP. “If they want to confine, they are going to confine sooner rather than later,” which may cause further disruption in the short term, he added.

Controls in other coastal cities will remain tight, said Dan Wang, the chief economist at Hang Seng Bank China. “We will probably see dozens or more than 30 cities confined at the same time (...) The economic cost is very high,” he said.

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