China’s Zero COVID Strategy: Stairway to Heaven or Highway to Hell (Part III)

The Cost of China’s Zero COVID Strategy on the Economy

As we are able to understand from the previous outlines, Zero COVID will not go away anytime soon and that brings other negative effects on top of social dissatisfaction, reduced mobility and expats leaving the country: economic costs and loss of long-term foreign investment attraction.

While the country will face severe downward pressures in Q2 this year due to the recent spring COVID wave, economists, analysts and researchers all agree the Q1 outlook was rather positive.

G. Bin Zhao, a Senior Economist at PwC China, has recently published a report on China Economic Quarterly 2022 outlining the major economic indicators:

• Total GDP reached 27 trillion RMB with growth of 4.8% in Q1;
• Total fixed asset investment reached 10.5 trillion RMB and increased by 9.3%;
• Total real estate investment went up 0.7% to reach 2.8 trillion RMB;
• PMI dropped to 49.5% in March;
• Industrial added values grew 6.5% in Q1;
• Total retail sales of consumer goods rose 3.3% to reach 10.8 trillion RMB in Q1;
• Imports and exports increased by 10.7% to reach 9.4 trillion RMB;
• PPI increased by 8.3% and CPI up 1.5% in March;

Data Source: National Bureau of Statistics, PwC China

The report also assesses the Central Committee of the Communist Party of China (CPC) and the State Council recent policy updates. The primary goal will be to break down local protectionism and segmentation and establish a rule-based market in China. In short, China’s domestic market will not be treated as a single/common market. There will be different initiatives based on local situations.

In a recent Industry Forum organized by AustCham Shanghai titled “China Economic and Financial Update 2022”, Kevin Xie, Senior Asia Economist for?Commonwealth Bank and Alan Chen, President of?Fosun?Capital Flagship Fund, also helped us put the economy in perspective not only in what portraits to 2022, but rather since the pandemic started:

• China is the only G20 nation with positive GDP growth in 2020 and surpassed the US to be the largest FDI recipient nation as FDI grew another 15% in 2021;
• China's share of global GDP grew to 17.8% in 2021 and will still be one of the fastest growth engines of the world economy;
• Technology innovation is a key policy focus and high-end manufacturing continues to grow strongly. In 2021, 51% of IPOs in China were in the manufacturing industry and 16% in IT - semiconductor and software soars whilst traditional consumer tech plunged;
• Mining and upstream manufacturing sectors performed well due to elevated commodity prices (global commodities rose 50% since 2020) while downstream manufacturing has slowed because of tighter COVID restrictions and weakening domestic consumption

Data Source: UNCTAD, IMF, AVCJ - China’s Economic and Financial Update 2022

However, when you take into consideration the bottlenecks of more frequent on and off lockdowns since the beginning of 2022, and particularly the ongoing Shanghai lockdown, we see some concerns and installing trends which can decelerate this pandemic growth pattern:

• Despite the fact that real estate investment went up 0.7% in Q1 2022 (contracted by 2.4% YoY), this continued the rapid deceleration from 4.4% at the end of 2021. In Q1 2021 it had increased by 25.6%;
• Despite the fact that retail goods were up 3.2% in Q1, many industries experienced negative growth, such as Jewellery (-17.9%); Catering (-16,4%); Clothing , Shoes and Textile (-12.75); Cosmetics ( -6,3%); Furniture (-8.8%); Automobiles (-7.5%).
• The GDP growth target of 5.5% is crucial to generate 11 million jobs in a year when the number of graduates will hit a record of 10.76 million. However, rising unemployment over the past six months and sharp fall of employment satisfaction could become an obstacle, in particular in the age gap 16-24 years old, where unemployment rate is at a high level of 16%;
• Inflation pressure remains muted in China thanks to government intervention because domestic market cannot afford to bear rising costs;
• The PBoC and SAFE announced a series of measures to support monetary easing and credit provision and to targeted (affected) sectors
• The private sector Caixin Markit PMI fell to 48.1 points in March from 50.4 points in February, the weakest reading since China’s initial COVID-19 outbreak in February 2020. The Shanghai lockdown came after meaning it will impact April’s readings.

?Data Source: Macrobond NAB Economics, China’s Economy at a Glance April 2022

• Certain sectors in Shanghai are crucial to the whole Chinese economy and can weigh up to 9% of the whole sector. The recent Shanghai lockdown will hurt industries which are crucial to the Chinese economy, and provinces such as Zhejiang will be severely handicapped;

Data Source: UNCTAD, IMF, AVCJ - China’s Economic and Financial Update 2022

The scenario does not look optimistic should these lockdown trends persist, so the government is attempting to balance this by urging provincial governments to front-load support measures to stabilize growth, employment and keep its GDP growth target of 5.5%. “Local authorities should implement new policies by the end of May to shore up growth” says Chinese Premier Li Keqiang.

One such example of how this may be accomplished is the heavy spending and advancing future-oriented infrastructure. Real estate and infrastructure investment are a key pillar of Chinese economy. According to JP Morgan estimates, real estate investment alone directly contributes?14-15% of GDP, including construction and residential property development, and about 25% of GDP if taking into account upstream and downstream sectors. As such, China's central authorities have vowed to build modern infrastructure system and strengthen infrastructure construction to help boost both industry and property markets.

According to a meeting of the Central Committee for Financial and Economic affairs held in late April, several projects have been approved and/or hastened in order to meet these targets.

Here are some examples:

• In Liaoning Province, Fuxing started construction of 50 key projects with a total investment of 6.3 billion RMB (935 million USD);
• In Hebei province, Xiong’An New Area is under construction - with a focus to become a smart city that runs on blockchain technology -, with 177 key projects and a total investment of 618 billion RMB (92 billion USD);
• In Fujian Province, 45 projects worth 29.2 billion RMB (4.35 billion USD) and in Hubei Province’s Wuhan a total of 54 projects worth 32.1 billion RMB (4.8 billion USD) began construction in the beginning of this year’s 2nd quarter;
• China Huaneng Group, a major state-owned power company, started the construction on 7 large-scale offshore wind power projects in northeast China's Liaoning Province, with a total investment of more than 14 billion RMB (2.9 billion USD);
• In Xinjiang, a new highway is being built on the Taklimakan, China’s largest desert, which has been dubbed “the road of hope” and will allow for the economic integration of the northern and southern regions in the province;

Image Source: Photo by Huang Mengwen, Macau Business

• In addition to traditional infrastructure projects, the construction of modern infrastructure such as 5G and big data centers and the construction of green energy systems have become new highlights of the current infrastructure layout, said Xu Hongcai, an economist with the China Association of Policy Science;
• On top of that and according to this year's government work report, the country also plans to issue 3.65 trillion RMB (550 billion USD) of special-purpose local government bonds;

The government believes all these and several other infrastructure investment efforts will inject new impetus for the country to achieve its growth targets.

But what about those too small to ever reach a piece of this stimulus pie? What of the fate of SMEs and private businesses?

I will explore more in my next article.

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This is an 8-part article series, which delves into the latest developments and impact of China′s Zero COVID Policy:

1. China’s Societal and Healthcare Concerns
2. The (Acceleration of) China’s Expat Exodus
3. The Costs of China’s Zero COVID Strategy on the Economy
4. The Costs of China’s Zero COVID Strategy on SMEs
5. The China Supply Chain Nightmare
6. The World and MNC’s Exposure to China
7. Deglobalization and Decoupling: Myths and Realities
8. Updates on China’s National and International COVID Policy

*All data, images and news sources have been properly hyperlinked in the article.

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