The Impact of China's Zero-COVID Policy

As parts of Shanghai lock down yet again, it remains apparent that China will continue to stick to its zero-COVID strategy. China’s approach to COVID has been to stop every possible infection through constant testing, contact tracing, and severe quarantine and isolation restrictions. And the entrenchment in this policy has only deepened, even as the rest of the world, including other zero-COVID proponents like Australia, New Zealand and Taiwan, moves on to live with the virus.

We see this in the ongoing investments China is making. Ramping up mass-testing through a network of tens of thousands of lab testing booths, China is building the infrastructure to keep all residents within a 15-minute walk from a test. We also see this in the things they are saying “no” to. On May 14, China withdrew from hosting the Asian Football Conference due to a COVID outbreak, but the tournament is not scheduled to kick off until June 2023.

And, of course, there are the lockdowns. These draconian measures are resulting in an economic crisis, not only in China, but echoed around the globe.

Over the last 20 years, China has been steadily rising a global economic power, making up one quarter of the rise in the global gross domestic product (GDP) over that timeframe. But now, China’s economy is skittering and sputtering. Retail sales in China were down 11.1% in April; factory production fell 2.9% from the prior year. The likelihood of China meeting its 2022 growth target of 5.5% is looking increasingly remote. The Organization for Economic Cooperation and Development (OECD) estimates the global GDP will fall 1.5% short of a December 2021 projection, due in large part to the continued shutdown of Chinese ports and major cities because of their zero-COVID policy.

What does this mean for the global economy? It certainly complicates supply chain concerns. For example, Shanghai has been essential to China’s auto industry, producing nearly 3 million new vehicles in 2021 and accounting for almost of 11% of China’s automotive production. This port city of 26 million residents was shut down for 2 months, with 15 out of the 16 districts locking down yet again on June 10 for mass testing. While most factories are reportedly resuming work now, the looming threat of another lockdown remains.?

The situation is untenable. It’s no wonder that customers are moving their work to the US and other countries with more stable economic outlooks as quickly as possible. An estimated 1/3 of supply chain leaders plan to move some or all of their manufacturing out of China before 2023. If zero-COVID policies continue to disrupt the supply chain, more and more companies may abandon China in favor of economic stability.

Even as China appears to be digging its own economic grave, the World Health Organization (WHO) warns of dangers of the “unsustainable” zero-COVID policy. As the virus evolves, the WHO recommends that we change our strategies as well. Zero-COVID may have made sense two years ago, and to be fair, it did serve China well for a long time. While some doubt the reported deaths, China currently has only a little 5,000 COVID-related deaths reported since the beginning of the pandemic. Compare this to the over 1 million deaths in the United States, and one can understand China's hesitancy to move away from zero-COVID.

However, we have so many tools at our disposal to fight the virus, from vaccines to anti-viral drugs. This means we can prevent themassive numbers of deaths that we were seeing earlier in the pandemic. With these tools in hand, countries like the United States and many other wealthy nations have moved into a "controlled pandemic" phase. The result is that many of these economies are now poised to pick up the pieces from China’s mistakes.?

Volatility will remain a global challenge. But there are things companies can do to mitigate this challenge. Moving work out of China and to domestic suppliers is one step. Dual-sourcing may be another. Some companies may opt to move toward directly buying from manufacturers. Companies should do what makes sense for them logistically and fiscally, while keeping in mind that a vacuum may be opening up in the supply chain if China does not pivot from zero-COVID.?