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Nearly two months after Shanghai was placed under lockdown, there are growing concerns among economists of far-reaching disruptions. Photo: Reuters

Economy China Economy

Explainer | What has China done to minimise impact of zero-Covid, and why are global-recession risks rising?

‘Confluence of shocks’ – including Ukraine war, coronavirus outbreaks in China, and the US Fed’s monetary tightening – are raising alarms over global economic growth
Beijing had vowed that ‘stability’ would be the top priority this year, but analysts say ‘2022 has been anything but stable’, and leadership ‘must feel so disappointed’

Coronavirus China

Amanda Lee

Published: 8:30pm, 18 May 2022

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China’s policymakers have heralded fiscal easing to help mitigate the wide-reaching impact of its zero-Covid strategy – but have yet to fully act, while a recession in the global economy is now among the new threats to global growth, according to various estimates.

Major indicators measuring the state of the world’s second-largest economy fell short of expectations in data released on Monday, with industrial production, retail sales, fixed-asset investments and the surveyed jobless rate falling to their weakest levels in more than two years.

“China’s economy fell into a temporary recession, caused by the widespread lockdowns,” Macquarie Group said in a note on Monday. “China’s policymakers must feel so disappointed at this moment. In the Politburo meeting last December, they hoped for an uneventful 2022 by calling for stability as the top priority. Unfortunately, 2022 has been anything but stable.”

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The International Institute of Finance (IIF) said in a report last week that global recession risks are rising amid the fallout of Russia’s invasion of Ukraine, coronavirus outbreaks in China and tightening monetary measures by the US Federal Reserve are adding further pressure to global growth.

“The confluence of these shocks threatens global recession. We are downgrading global growth significantly, such that we see a de facto flatlining in world gross domestic product (GDP) in 2022. That leaves little room to avoid an outright GDP contraction. Recession risk is elevated,” the IIF said.

Analysts believe China’s zero-Covid policy, which mandates mass testing, lockdowns and quarantines, will continue to suppress growth in the coming months. China is one of the few countries maintaining a policy of eliminating Covid-19, as most of the world has begun to live with the virus and vaccinations.

Why is China sticking with zero-Covid?

Beijing is steadfastly standing by its zero-Covid policy, despite rising concerns over its sustainability, cost and ethics. President Xi Jinping confirmed to the nation’s senior officials earlier this month that there were no intentions to shy away from their zero-Covid commitment, which he said will “stand the test of time”.

Xi, who is expected to secure his third term later this year at the Communist Party’s national congress, said China will prevail in the fight against Covid-19 in Shanghai, just as it did in Wuhan back in 2020, and he vowed to fight any attempt to “distort, question and challenge” the country’s policies.

Beijing has said that keeping coronavirus infections and death numbers low fuelled China’s strong and rapid economic recovery from the initial outbreak in 2020.

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A joint study by researchers at Fudan University, Indiana University in the United States, and the US medical research agency National Institutes of Health, published in the Nature Medicine journal last week, forecast that China could see about 1.55 million deaths from a wave of Omicron infections without Covid-19 controls and the use of antiviral therapies.

Liang Wannian, the head of an expert panel leading the nation’s Covid-19 response, said in April that, because of the low vaccination rate among the elderly and a lack of medical resources, the zero-Covid policy is essentially a form of “insurance for 1.4 billion people”.

What are critics saying about China’s zero-Covid policy?

World Health Organization (WHO) director general Tedros Adhanom Ghebreyesus said last week that China’s zero-Covid strategy is unsustainable, and he called for a policy shift. WHO emergencies director Michael Ryan said that any measures to combat the Covid-19 pandemic should show “due respect to individual and human rights”. However, their comments have been censored in China.

A number of economists, including Hong Hao, who was head of research at Bank of Communications (Bocom) International Holdings, have since been silenced on social media in China after making critical comments about its zero-Covid policy.

China hits out at ‘irresponsible’ WHO chief over zero-Covid criticism

Analysts said that the cost of maintaining the zero-Covid policy will continue to surge as more money is required to build quarantine facilities and conduct mass screenings.

And there are questions of whether local governments, who are in charge of imposing coronavirus-prevention measures, will have enough funds to cover the cost. To avoid being reprimanded, local officials are more inclined to extend lockdowns, critics say, making it difficult for people to return to normal life.

Foreign firms also have concerns over supply-chain disruptions, a mass exodus of foreign employees, and international travel restrictions. Earlier this month, a flash survey by the European Union Chamber of Commerce in China and management consulting firm Roland Berger showed that 23 per cent of companies polled were considering shifting their current or planned investments out of China due to the Covid-19 controls.

Another survey released last week by the German Chamber of Commerce in China indicated that nearly a third of foreign employees planned to leave China due to Covid-19-related measures, and 10 per cent planned to do so even before their current employment contract ends.

What has China done so far to steady its economy?

Beijing has vowed to use all means to steady the economy, though it has so far resisted large-scale stimulus. Instead it has since doubled down on Covid-19 control measures. The central government has also kept a tight grip on local government debt, and the property market, both of which have been key drivers of growth for decades.

The People’s Bank of China (PBOC) in April announced a much-anticipated – but smaller-than-expected – cut of its reserve requirement ratio, releasing 530 billion yuan worth of long-term liquidity into the interbank system. And on Monday, the central bank also introduced a further cut in mortgage rates for some homebuyers – a move seen as significant support by the central government to the beleaguered housing market.

Beijing also planned a 2.5 trillion yuan tax cut this year for hard-hit small businesses, as well as more spending on infrastructure construction by local governments. But many business owners say tax cuts do nothing when income has been wiped out by zero-Covid measures.

What other measures can China take to ease the pain?

Further easing on the property market to boost sales and construction of new houses will help to generate some growth. Chinese developers are in deep financial stress since last year.

Last week, Sunac China Holdings, China’s fourth-largest developer by sales, failed to pay US$29.5 million worth of interest due on a US-dollar bond before the deadline, and it does not expect to make payments on three additional notes.

In April, the commencement of new construction projects, as measured by floor area, plunged 44 per cent from a year earlier, while property sales by value in April slumped 46.6 per cent from a year earlier.

Is China using a ‘shadow stimulus’ to shore up economic growth?

Regional economies across China are likely to benefit from further relaxation in the property market, as their revenue mostly comes from land sales.

Analysts have suggested that the central government could relaunch a special treasury bond to help fund Covid-hit regions – an arrangement previously made in 2020. Following the initial outbreak, the central government issued 1 trillion yuan worth of special treasury bonds and transferred the funds directly to local governments.

There are growing calls in mainland China to issue direct stimulus payments to consumers – like those that have been distributed in Hong Kong and the United States – to boost the economy that is being increasingly strained and tested by the nation’s zero-Covid strategy.

01:48

Shanghai plans to start lifting months-long lockdown in June

Will such measures help limit the economic damage?

Only when the lockdowns are lifted can any form of stimulus be effective, according to economists. As such, many experts believe China is likely to miss its 2022 growth target of “around 5.5 per cent”.

Rory Green, head of China and Asia research at TS Lombard, expects Beijing’s stimulus measures to be less effective than similar measures were in previous cycles.

“The multiplier of monetary easing, in particular, is much lower, given property sector weakness and Covid,” Green said. “With zero-Covid in place, consumer and business mobility will remain restricted, consumer confidence and wages weak, and with it demand for credit low.

“Real [GDP] growth is likely to come in well below 5.5 per cent, year on year, in 2022.”

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