China has maintained a zero-COVID policy since early 2020. How has this policy impacted the Chinese economy overall? Which sectors are the hardest hit? Has the zero-Covid policy further worsened the real estate crisis?
There have been two different stages of COVID in China. The first stage was last year when China's economy was doing OK because the infection rates remained very low, and cities were open. Internationally, it was cut off from the rest of the world, but it could maintain its zero-COVID policy at home. This year, because of the dynamics of the virus, everything is different. During this second stage, the virus is mainly Omicron, which is more contagious with minor symptoms. It is more like a common cold and even less severe than the flu. Now China has more of a “zero-cold” policy, which does not make a lot of sense economically. From a public health perspective, the policy is not appropriate this year, despite having a real rationale last year. Delta was very deadly for older people and people with chronic medical conditions, but Omicron is different.
There are two major industries in the country: manufacturing and services. Even this year, manufacturing manages to work because, while there are supply chain problems and inflation, demand for Chinese goods is still high. There is a shortage of goods in many countries, including the U.S., which is why we see prices going up very quickly. Hence, Chinese manufacturers can do very well, just like last year. As for services last year, domestically, China was doing fine since it remained open, but it is hard hit this year due to Omicron’s high contagiousness. If you want to keep cases at zero, you must lock down almost every city. This means people are not able to go to restaurants or travel. Business is hurting very badly, especially small businesses. However, most factories in China have workers who live in dormitories. They have a canteen, and the workers don't leave the factory. That is why factories can keep running and maintaining their production. So, manufacturing is doing better than the service sector.
The problems in the property market are another question, and they are not due to COVID. The real estate market boom has been going on for over 20 years. There are always boom and bust cycles in the property market, just like the economy. No country can see housing prices go up forever. That means China's housing prices have already reached the time for a correction. Even before COVID, there was excess supply. Builders constructed many apartments, especially in the non-major cities besides the big cities like Beijing, Shanghai, Shenzhen, and Hangzhou. In some smaller cities, many households own two or more apartments, but you can only live in one. What do you do with the other one? For cities like Beijing and Shanghai with a net increase in population, it makes sense. But for others, it does not. There are even people moving out in some smaller cities, so that market has already reached an inflection point. With government policies, the sector was hard hit. COVID is not the cause, but it is making things even worse. People cannot go out to buy apartments. There is zero demand in many cities. Also, this sector depends on employment because you need to borrow from the bank, and the bank will look at your record of income in the past. If a lot of people don't have jobs, it will be hard for them to buy apartments and the demand will go down.
Aside from constant disruptions, what are the potential long-term consequences of the economic damage caused by the zero-Covid policy? Can you specifically discuss the implications for China’s position as the global manufacturing hub? Do we see evidence that foreign trading partners and investors are rethinking their China strategy because of the zero-Covid policy?
The manufacturing sector, like I said, is not much affected by the COVID policy. The service sector is the major issue. For example, most people who live in Shanghai are not in the manufacturing sector, they are in the service sector. For trade, manufacturing is only one part of the story, the other parts are finance and other service sectors. Those people in major cities are hard hit. The Shanghai lockdown earlier this year made many foreigners leave the country, which will have a long-term impact. People and trading companies and businesses in service sectors will reconsider whether there is too much risk in this country and may relocate their businesses.
China’s position as the global manufacturing hub is more complicated than the zero-COVID policy. This is also about geopolitics and the U.S.-China relationship. There is a risk for businesses. What if one day the two countries don't trade with each other? If they really decouple, then the companies must shut down their business. Purely from an efficiency point of view, we know that other developing countries are still far behind China. It will take a long time for them to catch up. Moreover, they cannot fully catch up with China because of its large size and its world-class infrastructure in terms of its ports, freeways, etc. The infrastructure has been built up over the past three or four decades. In terms of investment, on one hand, multinational companies know there is a high risk, but on the other, they still want to maintain a low price. There is also a major domestic market in China that companies do not want to give up. So, to conclude, the story is quite complicated now, compared to a bull market a decade ago.
How has the Chinese government responded to the negative economic impact of covid-related disruptions? How would you evaluate such responses?
The government hasn't done much since it believes that there is a tradeoff between zero-COVID and the economy. The government made a choice between the two. At the moment, the zero-COVID policy is seen as more important than the economy. Most other governments give money to consumers to subsidize their loss of income. But China hasn't done much from that perspective. Zero-COVID policy is a cost the Chinese have to bear themselves. My estimate is that the policy will be relaxed next year. Hong Kong has already relaxed their policy so I think mainland China will soon too.
How are Chinese businesses and consumers coping with the zero-Covid policy? How do small businesses try to survive in this environment?
Small businesses won't survive, they will die. But once the country reopens, there will be new businesses created. Some people have lost their savings. But those who can do online businesses, like Taobao(淘宝) or Meituan(美团) and deliver services this way, may survive. Even in the U.S., the restaurants are focusing on online platforms like Amazon and DoorDash for shopping or dining. The shopping malls, however, have major issues now and it will be hard to survive.
Do you foresee a rapid pick-up of business activity after the zero-Covid is abandoned? What will the Chinese economy look like structurally after the return of some normalcy?
It depends. A lot of businesses have already gone online before COVID hit. But there are certain things, like travel, that will pick up quickly. If you look at the photos taken in China recently, it is crowded everywhere. People want to go out, for the sake of their mental health. So, travel and dining will pick up very quickly, Chinese love to go out to eat.
In economics, we care about cost and risks. People have different calculations about risk. They also choose their lifestyle: I don't want to quarantine all the time. I will choose to live in a place that doesn't have this kind of policy. This is something that has already happened. In terms of the economy, I don’t see major changes because of the COVID policies. It is more about the risks of doing business in China.
There is a major shift in global supply chains because of U.S.- China relations. We call it decoupling in the U.S. and in China it is called “double circulation” (双循环). Both countries are preparing for the possibility that one day the two countries will be cut off from each other, like the U.S. and Russia. If that happens, there will be a major change to world trade and the two countries’ economy. That is the bigger picture. COVID may increase the speed with which the global economy shifts.
Adi Constantin, CC0, via Wikimedia Commons