China’s zero-coronavirus policy has businesses fearing Ghost of Covid Future

  • December and January typically mark the peak shopping period for Lunar New Year gifts, but lockdowns and an uncertain 2022 have crippled domestic consumption
  • There are growing concerns within China over the cost of maintaining such restrictive coronavirus-control measures

This was supposed to be the most wonderful time of year for China’s retailers.

But even with the Lunar New Year just a month away, Huang Hongmei, a vendor who made a living by selling garments in Guangzhou, has packed up and left the city during what is usually the peak period for gift purchases ahead of the holiday.

A coronavirus outbreak that began in China’s manufacturing hub of Guangdong province last month hit Huang’s retail business hard, and she has been struggling to make ends meet.

“It is equivalent to earning about 30 yuan (US$4.70) per day – not enough to pay for meals, let alone rent and gas,” Huang said. “Many people like us can’t make any money.”

She laments how it became increasingly common for potential customers, often middle-aged women, to try on a 30-yuan sweater, mull over whether it was worth the purchase, then leave without buying.

An earlier lockdown in June cost Huang a month’s income as nearly 600,000 residents in Guangzhou’s Fangcun district were isolated for 27 days after local health officials confirmed at least 26 cases.

“Those of us who were in lockdown – from small-business owners to private-sector employees – had no income for a whole month, but we still had to pay every cent of our rent or mortgage, plus living expenses,” she said.

The following months were not much better, and Huang eventually returned to her hometown, a rural township in western Guangdong. She said she doesn’t expect to sell garments in 2022, and is seeking other job opportunities.

China’s strict zero-Covid policy relies on mass testing and lockdowns to quell outbreaks, and the measures have helped the national economy recover quickly, despite short-term disruptions. But there are growing concerns over the cost of maintaining such restrictive policies, as China’s economic growth is expected to slow next year. Meanwhile, the country looks to remain on high alert for coronavirus cases in the lead-up to the 2022 Winter Olympics in February.

Gloria Luo, a senior sales manager at a Guangdong-based manufacturer of automotive parts and industrial molds, said the company had sought to capture a larger overseas market share by expanding rapidly pre-pandemic. But last year it was forced to close most of its overseas offices.

“Raw material prices and logistics costs for automotive molds have been skyrocketing … like steel materials imported from Germany and the United States,” Luo said. “Our material costs account for more than 50 per cent of the total cost, and logistics and transport rose sharply to account for 15 per cent, plus 25 per cent for processing costs. That eats away at most of the profits.

“Coupled with the souring relations between China and the West, it feels as if Chinese automotive mold companies suddenly lost most of their competitiveness [in 2021], and now many European and American customers have turned to South Korea or Europe to place orders, not to China any more.”

Luo said the firm’s total number of employees has dropped from more than 9,000 three years ago to more than 4,000 now.

Indeed, Nomura wrote in a note on December 20 that the “real drags on the Chinese economy” are supply-side shocks due to the rising costs of the nation’s zero-Covid policy, along with slowing export growth and a worsening property sector.

“In our view, much more aggressive easing and stimulus measures to directly address those bottlenecks would be needed before we would see a rebound in growth,” the note said.

This is evident in places such as Xian, in China’s northwest province of Shaanxi, which has confirmed well over 1,000 locally transmitted infections since December 9 – the latest domestic cluster caused by the coronavirus Delta variant.

The city, a hub for military and aviation sectors, locked down 13 million people to contain community infections.

Also in Xian, Samsung Electronics’ US$26 billion memory chip complex – one of the largest foreign-funded projects in China – is facing operational and logistical uncertainties after the city tightened its lockdown measures last month.

And BYD subsidiary BYD Auto, China’s largest electric vehicle maker by sales, said on December 24 that it had to cut production at its plant in Xian as a result of the lockdown measures.

From multinational firms to small businesses, the disruptions resulting from China’s zero-Covid goal are wide reaching and difficult for owners to navigate.

Peng Biao, who specialises in industrial digital printing, said a mid-December lockdown of Dalang town in Dongguan city has put owners of small and medium-sized (SME) businesses at risk, along with the self-employed.

“Dalang has more than 17,000 wool-related factories, and one out of six sweaters in the world are produced in Dalang,” she said. “The town’s lockdown here has affected a lot of factories in the Pearl River Delta and Yangtze River Delta.”

According to a survey released in September by the American Chamber of Commerce in Shanghai, 53.4 per cent of companies said Covid-related travel restrictions had hurt their ability to attract and retain foreign talent. Meanwhile, 45.1 per cent of respondents said Covid-related restrictions had negatively affected their operations, while 35.9 per cent said it hurt their staffing level, and 33.8 per cent reported lost revenue.

Another survey by the British Chamber of Commerce, released last month, showed that 41 per cent of British businesses operating in China expected a significant number of their foreign employees to leave China indefinitely this year. The reasons included the emotional toll associated with being separated from friends and family, and the potential difficulty of returning to China after they have left.

One in four businesses said that the travel requirements, logistics of re-entering China, and costs of travelling back all represented significant challenges.

Despite the dwindling consumer demand and business disruptions, many analysts expect the Chinese government to press on with its heavy-handed approach to the coronavirus.

“Authorities have been enforcing brief but stringent lockdowns in parts of the country to control outbreaks in those areas. These lockdowns are effective in preventing infections but weaken consumer confidence, spending, and growth,” Standard & Poors Global Ratings said in a November 29 report, referring to China’s zero-Covid strategy.

Meanwhile, Xie Junping, a fabric exporter in Zhejiang province, is among those whose businesses have actually improved amid China’s pandemic-control measures.

“My orders doubled [in 2021] because many other Asian countries lost production capacity … in the pandemic,” Xie said. “But it is true that domestic demand has been weak. For example, when there was a case in a single community in Hangzhou, a large number of restaurants, stores and service industries in and around Hangzhou immediately stopped seeing customers.”

After accounting for 54 per cent of gross domestic product (GDP) in 2019, China’s service sector has yet to fully bounce back from the pandemic, and its recovery continues to lag that seen in heavy industries, according to a recent research note by Citic Securities.

“The key reason for the lower-than-expected consumption recovery [in 2021] is the slowdown in income growth and the constraints from pandemic prevention and control measures,” the note said.

Sun You, who works for a Japan-invested company that has a stake in a hotpot restaurant in Guangzhou, expects the negative impact of the zero-Covid policy to outweigh the positives.

“In other countries, the expectations of returning to normal life are already growing, but here we have started to feel the pain of stagflation,” Sun said, noting that the restaurant saw its daily revenue drop in December from 8,000 yuan to 4,000 yuan.

China’s zero-Covid policy is aimed at “cutting off the transmission chain quickly” and “achieving the maximum effectiveness at minimum cost”, said Peng Peng, executive chairman of the Guangdong Society of Reform, a think tank with ties to the provincial government.

In terms of “achieving maximum effectiveness at minimum cost”, Peng Peng said, “China has already won”. He specifically pointed to relatively low infection and mortality rates, relative to other economies.

But in terms of economic growth, the zero-tolerance approach comes at the expense of public resources, and this almost certainly impedes the progress of other government projects and initiatives.

Meanwhile, he said, many employees – especially at SME firms – are struggling with shrinking incomes, lay-offs and mounting concerns about how they will make a living in 2022. These factors are having a big impact on consumption, Peng Peng explained.

There are no official or third-party statistics to show the exact economic cost of the zero-tolerance policy. In terms of data, exports have clearly benefited from the policy, but domestic demand has been paying a high price.

According to the National Bureau of Statistics, the total value of China’s foreign trade from January to November was 35.39 trillion yuan (US$5.55 trillion) – a 22 per cent year-on-year increase, and 24 per cent more than during the same period in 2019.

Exports grew 21.8 per cent, year on year, meaning that China’s share of global exports improved to 14.5 per cent in the first half of 2021, up 0.9 percentage points from the same period in 2020.

Meanwhile, insufficient domestic demand has become a major problem in China. From January to October, retail sales of consumer goods grew at a two-year average rate of 3.97 per cent – still a far cry from the 8 per cent growth rate seen in 2019.

Authors: He Huifeng, Amanda Lee, SCMP

You might also like