Tuesday, January 25, 2022

China’s Zero COVID policy and ensuing restrictions cripple domestic consumption

China’s Zero COVID policy and ensuing restrictions cripple domestic consumption

 

China’s zero-Covid policy has started causing disruptions from multinational firms to small businesses and making it difficult for owners to navigate. News reports coming from places such as Xian, which is in lockdown due to the latest domestic COVID outbreak highlighted the disruptions caused in the supply chains. The city, a hub for military and aviation sectors, locked down 13 million people to contain community infections. As a result, Samsung Electronics’ US$26 billion memory chip complex in the city, one of the largest foreign-funded projects in China, is facing operational and logistical uncertainties after the city tightened its lockdown measures last month. US chip maker Macron also reported similar issues. China’s largest electric vehicle maker BYD Auto said that it had to cut production at its plant in Xian because of the lockdown measures.
A coronavirus outbreak that began in China’s manufacturing hub of Guangdong province in December hit retail business hard with many people losing their jobs and shrinking consumption appetite. Local media reported that Beijing has set its sights on boosting consumption, but it may be difficult to convince people to spend what little money they are able to save as salaries are capped or cut. Along with the property market, consumption is one of two areas economists are most concerned about in their outlook for China. While overall income growth among many Chinese has yet to recover from the impact of the pandemic, demand among China’s lower-income groups is likely to remain subdued as pressure grows on the economy.
In November, Premier Li Keqiang warned of “new” downward pressure on the economy, stressing that the government needs to focus on keeping employment steady and providing support for China’s small manufacturers. Li raised similar concerns in a symposium in Beijing with economists and entrepreneurs in November. Top leaders in Beijing warned at an economic planning meeting in December that growth faces pressure from shrinking demand, supply shocks and weakening expectations. Experts say that the core problem of these pressures is still a weakening of demand or insufficient demand in which case, economic development cannot be sustained.
Nomura, a Japanese financial services company wrote in a note in December 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.
The 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 as reported by local media quoting experts. Meanwhile, the country remains on high alert for coronavirus cases in the lead-up to the 2022 Winter Olympics in February.

Anshuman Mishra/ Beijing/ 3/1/2022

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