Source:
https://scmp.com/comment/opinion/article/3163200/chinas-zero-covid-strategy-problem-world-supply-chain-disruptions
Comment/ Opinion

China’s zero-Covid strategy is a problem for the world as supply chain disruptions, inflation stall recovery

  • Recent citywide shutdowns and the return of strict social distancing measures suggest China’s self-imposed isolation will not end soon
  • While shifting from pandemic to endemic has its own challenges as the West well knows, the economic impacts of ‘zero-Covid’ are making global recovery harder
A government worker mans a pandemic checkpoint outside a residential block in Xi’an on January 3. The Chinese city has been in lockdown since December 23, 2021. Photo: AP

Barely a day goes by without a call for China to rethink its hardline stance on fighting the pandemic. Beijing’s “zero-Covid” strategy, hailed as a success in 2020 when the swift reopening of China’s economy was seen as a vindication of stringent measures to control the virus, is now viewed as unsustainable.

China lost the narrative in the global recovery when Western economies began deploying vaccines, allowing them to reopen just when China’s recovery was faltering. Yet, the government’s determination to maintain its zero-tolerance policy is fuelling concerns that it lacks an exit route.

The combination of doubts over the efficacy of China’s vaccines as community transmitted cases of the Omicron variant trigger citywide shutdowns, and fears about the severity of the downturn, has reinforced a perception that the country is caught in a vicious circle. Ever more frequent lockdowns are taking a bigger toll on the economy while failing to contain infections, prompting tougher growth-sapping restrictions.

The recent lockdowns in Anyang and Xian, imposed in response to rises in cases that are minuscule compared with those in many Western nations, suggest China will remain in self-imposed isolation for longer than previously assumed.

Yet, while most attention has focused on the sustainability of Beijing’s draconian response, the global impact has been just as far-reaching, if not more. China’s zero-Covid policy continues to have a profound effect on the post-pandemic world.

First, although Beijing has come in for severe criticism for pursuing such an extreme policy, its zero-tolerance strategy is the alternative to the “learning to live with Covid” approach pursued by Western countries. As such, it is an important frame of reference for determining whether the decision to live with the virus in some form is the best way forward.

Leaving aside the moral, ethical and political issues that have fuelled the debate over the handling of the pandemic, particularly in the US and Britain, it is clear that stringent lockdowns have become harder to sustain. The availability of rapid tests and effective vaccines offer the best exit route.

Yet, there is a fine line between learning to live with the virus and pretending it does not exist. Lockdown fatigue, non-compliance with regulations, insufficient testing capacity and, crucially, vaccine scepticism have undermined the learning process.

Chinese city Yuzhou of over 1 million forced into lockdown with just 3 coronavirus cases recorded

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Chinese city Yuzhou of over 1 million forced into lockdown with just 3 coronavirus cases recorded

In France, new cases hit 368,149 on Tuesday, a record high. In England, one in 12 teachers was absent in the first week of 2022 due to a surge in school infections. Meanwhile, in the US, the seven-day rolling average of cases has reached a staggering 760,000, three times the level at the peak of the third wave in January 2021.

Just as eradicating the virus through suppression is impossible, the shift from pandemic to endemic is much harder than many assume.

Second, when it comes to zero-Covid’s impact on the global economy, the damage is already done. The disruption within China, the centre of global manufacturing and home to seven of the world’s top 10 container ports, has contributed to the severe strain on supply chains, causing a worldwide traffic jam that has hit businesses and consumers.

The shipping industry has borne the brunt of the disruption. The cost to ship a 40-foot container from Shanghai to Los Angeles, one of the world’s busiest lanes, has soared to US$10,520, nearly six times the rate just before the pandemic erupted, data from maritime consultancy Drewry shows. The longer China resorts to stringent lockdowns, the greater the pressure on supply chains.

China immigration officers wearing protective clothing patrol a container port in Qingdao on November 7, 2021. Photo: AP
China immigration officers wearing protective clothing patrol a container port in Qingdao on November 7, 2021. Photo: AP

Third, supply bottlenecks have been the key factor behind the dramatic rise in inflation, especially in the US, which has forced many central banks to turn more hawkish. While consumer prices remain relatively subdued in China itself, mainly because of the plunge in pork prices, the supply-driven inflation shock has increased the risk that price expectations become entrenched.

Bond markets, which have fallen sharply since the start of this year, expect the US Federal Reserve to raise interest rates four times this year, possibly as soon as March. The probability that supply-driven price pressures will last longer than anticipated, coupled with stronger-than-expected wage growth, make it more likely that the Fed will commit a policy mistake by raising rates too quickly.

To be sure, China’s zero-Covid strategy is just threat to global growth and asset prices. Western economies’ massive monetary and fiscal support packages, which have helped push up bond and equity valuations to dangerous levels, are coming back to haunt them. Geopolitical risks, forever downplayed by investors, look underpriced.

Yet, Beijing’s uncompromising stance on the virus poses a significant challenge for other countries. John Connally, former US president Richard Nixon’s Treasury secretary, famously told his European counterparts that the dollar was “our currency, but your problem”. China’s zero-Covid policy is a problem for the entire world.

Nicholas Spiro is a partner at Lauressa Advisory