China’s COVID-19 Lockdowns: Considerations for Investors & Future Impact
This article was originally published in Italian in Panorama on 11th May 2022.
Please note that this is a courtesy translation of the Italian language article originally published in the Panorama Magazine Issue at: https://www.panorama.it/economia/zero-covid-19-policy-business-europeo-cina
Introduction
In recent months, China’s strict COVID-19 response, following numerous outbreaks of the Omicron variant have lead to full or partial lockdowns in at least 45 cities—accounting for 40% of China’s gross domestic product with a combined population of 370 million people.
Harsh Realities of the Marketplace
An array of lockdowns in Shanghai (the country's largest urban economy, with a population of 24.89 million) and other Chinese cities is piling severe pressure on transport and logistics across the country, not to mention far-reaching economic and social costs. Shanghai in particular, China's leading financial center and some of its largest sea and airports has been under lockdown since late March, with as of yet, no end in sight.
The current situation in Shanghai, which only last year recorded a GDP reaching 4.32 trillion yuan (614 Billion Euro), up 8.1 percent over the previous year, smashing expectations of 6 percent annualized growth rate, is of distinct significance. As the world's largest container port, the lockdown in the municipality has caused shipping delays to worsen, putting more pressure on the already exacerbated global supply chains. Alongside factory closures in Shanghai and other neighboring cities and provinces only adding to the disruptions to key supply chains for electronics and automotives both domestically and internationally (83% of European Chamber of Commerce Member Companies outline that China’s COVID-19 control measures have negatively impacted their manufacturing capabilities.)
To put the current scenario into perspective, according to the latest data derived from the European Chamber of Commerce in China’s flash survey, COVID-19 and the War in Ukraine: The Impact on European Business in China, both upstream and downstream supply chains have taken a significant hit for European Chamber member companies, with 92% of respondents reporting a negative impact concerning China’s COVID-19 containment measures on their supply chains. Specifically, 85% are struggling to access raw materials or components needed for production, 89% are struggling to transport raw materials or components needed for production; 87% are struggling to deliver finished products within China, and a further 83% are struggling to deliver them to the globally.
In addition, such uncertainty has also put a serious strain on the resources of small and medium enterprises (SMEs) As a result of the mass lockdowns across China, and other COVID-related restrictions, 23% of respondents to the aforementioned survey have started to consider shifting current or planned investments in China to other markets. While a protracted fight against the pandemic has forced SMEs to innovate in order to survive, there are certainly lingering doubts regarding how long such an approach can last.
Growing Concerns
Prospective investors should note that the capital of Beijing has yet to impose such a city-wide lockdown as in Shanghai, however, much of the city has been brought to a standstill. At the time of writing, local authorities have shut down more than 40 subway stations and 158 bus routes, adding to a growing list of measures that include erecting barricades around residential areas, banning indoor dining, and shuttering many cinemas, malls and gyms, with many businesses and residents fear that harsher measures could soon be on the way as smart-working is widely implemented throughout the region.
After the disruption of shutting down Shanghai, another city-wide lockdown would deal a serious blow to business confidence at a time when the economic costs of “zero-COVID” strategy are becoming increasingly visible, with the stringent restrictions put in place dispelling any expectations that the country may relax its zero-tolerance approach.
Economic Outlook and Impact
As countries around Asia begin to bounce back in a post-COVID world (take for example India, which has a GDP growth forecast for 2022-23 set at 7.4 per cent), the World Bank has recently lowered China's 2022 growth forecast, estimating that the world's second largest economy will now grow at 5% this year, sharply down from last year's 8.1% and also lower than China's official target of about 5.5%.
These statistics are further reflected via businesses within the marketplace, with nearly six out of ten businesses already downgrading their revenue projections for 2022 as a result of China’s stringent COVID-19 containment measures
With all that being said, the majority of respondents to the aforementioned flash survey have indicated that considering their Chinese investment, they are either not planning to make any changes (36%), or that it is too early to consider doing so (46%). This demonstrates that, despite the significant challenges which European companies are now facing in the Chinese marketplace they remain committed to China in the long-term.
Economically speaking, an important point to note is that in early 2021, China’s National Bureau of Statistics reported that the country’s gross domestic product grew by a record 18.3% in the first quarter of the year in comparison to the same period in 2020. This figure at the time was heralded as an indicator that China’s economy was roaring back to pre-pandemic levels, marking China's highest annual growth rate since it first began recording the statistic in 1993. In this sense, we can never rule out an extraordinary surprise in China, as comebacks are always around the corner.
Conclusion
Businesses and in particular, foreign invested businesses require certainty and predictability in the market, with the latest lockdown measures sweeping across the country with no set date for alleviation, even the simplest of business operations (banking, deliveries, production) have become insurmountable tasks. China’s current COVID-19 containment policy is tough, with the business environment somewhat harsh at this moment in time and yet, such is the strength of the China market, in a few months from now we may indeed be celebrating yet another remarkable comeback.
In order to set this possibility in motion and to bring more stability to the market, the approach recommended by the European Chamber of Commerce in China, which has been outlined in letters to the Chinese authorities, is to focus on vaccinating the entire population, including the elderly and vulnerable; allowing positive cases with no or mild symptoms to quarantine at home; and permitting the best mix of vaccinations and boosters to be used. In utilizing these measures, existing and potential investors may once again have full confidence in entering and thriving in the prosperous Chinese marketplace.
