China’s COVID-19 lockdowns drag down economy and cause ripple effects around world

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Strict COVID-19 lockdowns in Shanghai and other cities across China are dragging down the world’s second-largest economy, threatening key growth targets and causing international knock-on effects at a time of worldwide instability.

Parts of Shanghai have been closed for more than two weeks now, with residents unable to leave their homes for any reason. Many have reported running out of food and other goods amid a supply chain crunch, as well as struggling to access non-COVID medical care – even for life-threatening conditions.

A handful of neighbourhoods began easing restrictions this week, but the majority of the city’s 26-million people remain locked down. On Wednesday, Shanghai reported 26,330 new cases, a daily record, as officials warned community spread has still not been curbed despite the strict controls.

“There is a strong sense of uncertainty throughout the city, and it’s fuelled by supply shortages, endless lockdowns and a really big fear of being sent to one of the central quarantine camps,” said Bettina Schoen-Behanzin, the Shanghai chair of the European Union Chamber of Commerce in China.

Other cities, too, are facing tough restrictions. A recent analysis by financial research firm Gavekal found that, of the top 100 Chinese cities by GDP, all but 13 had imposed new quarantine regulations – and “the intensity is increasing.”

The vast majority of goods in China are transported overland, and the new controls are causing chaos, with truck drivers facing frequent checks, unpredictable testing requirements and the ever-present threat of quarantine.

“The prolonged lockdown in Shanghai plus local authority-ordered highway controls in a number of provinces are severely disrupting logistics in China,” Tommy Wu, a Hong Kong-based analyst for Oxford Economists, wrote in a note Wednesday.

“We believe that even if highway controls are lifted in the coming weeks, the disruption will take some time to clear and will affect industrial production and exports in April and May – if not longer.”

On Monday, China’s State Council issued a directive prohibiting roadblocks and calling for “more efficient COVID-19 screening along transportation routes.” But despite claims in government-run media that this had helped alleviate supply chain crunches, there were still widespread reports of long delays and drivers unwilling to travel to certain areas for fear of being quarantined.

Over the past two years, many provincial and local officials blamed for mishandling outbreaks have lost their jobs, and with Beijing still advocating a strict “dynamic zero-COVID” approach around the country, there are strong incentives for erring on the side of extra controls, regardless of the recent guidance.

Nick Marro, the lead analyst for global trade at the Economist Intelligence Unit, said Beijing has stressed “this entire time that at the end of the day what wins out is health care policy, more than economic policy or anything else.”

Last month, China set a modest annual growth target of “around 5.5 per cent,” but most analysts expect it will struggle to hit that. On Wednesday, China reported a 10.7-per-cent year-over-year increase in foreign trade in the first quarter, but this is likely not reflective of the recent disruptions, which began in late March.

Top Chinese officials are looking increasingly concerned. Premier Li Keqiang warned this week that “downward economic pressure has further mounted.” He urged officials to “strengthen the sense of urgency” when it came to ensuring economic stability, expediting the reduction of taxes and fees and pumping government money into infrastructure, particularly for construction projects, a favoured tool of Beijing for driving economic growth.

Mr. Marro said “we’re going to see a continued expansion of the state sector in a way that will have consequences for productivity, debt serving, the market-based allocation of resources – all these things China has being trying to deal with for decades but keeps getting distracted from by other policy priorities.”

Current measures, particularly the lockdown in Shanghai – home to the world’s busiest container port – are also exacerbating an already weakened global economy. Officials have endeavoured to keep port operations functioning as usual, and some factories have had workers bunk down on site, but it’s unclear how long these measures can last, with some businesses such as Apple and Tesla already pausing operations in Shanghai.

“We hear more and more that some workers aren’t volunteering, since there is no clear end to the lockdowns and they don’t want to live on site for weeks and sleep in the factory or in an office,” Ms. Schoen-Behanzin, the European Chamber chair, told a media round table this week.

Beyond supply chain issues and economic uncertainty, any slowdown in the domestic Chinese economy also “has consequences for a lot of markets in Asia” and further afield, Mr. Marro said, given the size of China’s consumer base.

For the most part, despite the growing economic costs, Beijing has shown no inclination to move away from its strict containment approach to COVID-19, leaving the country increasingly isolated internationally and sparking anger even in a population that was previously broadly supportive of such measures.

In Shanghai, numerous videos of people arguing with officials have gone viral, while some residents trapped in their apartments have taken to shouting from their windows and balconies in frustration. One neighbourhood even deployed a drone in an apparent attempt to dissuade such protests. It played a recorded message instructing residents to “control your soul’s desire for freedom” and go back inside.

But “the great mass of people in China support zero COVID,” said Frank Tsai, the Shanghai-based founder of consulting firm China Crossroads.

He pointed out that Beijing’s approach has been hugely successful in containing the virus and keeping deaths to a minimum, while enabling much of the country to operate normally since mid-2020 – albeit with restrictions on travel, particularly internationally.

“Most of China has never been locked down, and so for them the drawbacks of this policy are still only theoretical,” Mr. Tsai said.

Reporting on lockdowns and supply chain issues is also limited in China by strict media controls. State-run outlets frequently inveigh against adopting measures more in line with the rest of the world, comparing such approaches to “lying flat” and allowing the virus to run rampant.

Nor is the government’s fear of easing up unfounded. About 90 per cent of China is vaccinated, but this is heavily skewed toward younger people, especially when it comes to getting a booster shot, vital to protecting against the Omicron variant.

Only about half of people 60 or older have received three jabs, leaving them vulnerable. Hong Kong has recently shown what happens when Omicron rages through a territory with poor vaccination rates; a similar situation in China could see tens of thousands of deaths and a severe strain on the country’s health care system, potentially to the point of collapse.

The risk of such an eventuality in a country where the government places an absolute premium on stability – and has made COVID-19 containment a key point of pride – is likely considered far too costly, no matter the economic damage caused by the current approach.

With a report from Alexandra Li.

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