Not all companies have had a hard time in China during the covid zero policy. Andon Health, a Shenzhen-listed company that makes covid tests and medical devices, for example, posted a 32,000% increase in its net profit during the third quarter of the year compared to the same period in 2021, as it produces test devices for China and the United States. The 35 largest companies producing covid-19 tests have obtained revenues of 150 billion yuan (21 billion dollars) in the first half of 2022, thus the pandemic has created a new generation of tycoons.
However, beyond the covid-industrial complex, the Chinese economy suffers. Lockdowns and tight restrictions on freedom of movement have slowed consumer confidence and economic growth. In the last fortnight, those measures have given rise to protests across the country, and tensions have escalated over the weekend. On November 27, young people in Shanghai took to the streets chanting "We don't want Covid tests, we want freedom" to reject the prospect of endless lockdowns and checks.
The economic effects of China's attempt to rid itself of the virus have never been more apparent. The freedom of movement of people has been seriously restricted. During the week of November 14, as infections increased, the number of domestic flights fell 45% compared to the previous year. The three largest airlines have collectively lost 74 billion yuan in the first nine months of 2022. Metro traffic in the ten largest Chinese cities has fallen 32% year-on-year, according to Australian investment bank Macquarie. Box office receipts, an indicator of the population's willingness to leave home, have fallen by 64%. Only 42% of Chinese cinemas were open on November 27. Some of the largest cinemas have closed permanently.
According to an index compiled by the Japanese investment bank Nomura, cities under lockdowns today account for a quarter of China's GDP, a proportion that exceeds the previous high of one-fifth reached in mid-April when Shanghai was locked down. China's youth unemployment rate reached a record 19.9% in July. According to one indicator, in the week before November 25, road freight traffic was 33% below the level of the previous year.
As covid infections reach unprecedented levels, policymakers are trying to energize the economy. The central bank has announced a reduction in the reserve ratios required of lenders. Technocrats have tried to breathe life and confidence into the Chinese property market, whose sales have plummeted over the past year. Relief measures announced in mid-November have sought to ease access to credit for struggling developers so they can continue building. The environment is expected to improve. Still, continued lockdowns and consumers' poor sense of security are likely to deter potential homebuyers from buying. And the prospects for 2023 seem increasingly bleak for the economy as a whole.
At the time, keeping the covid at bay seemed like a good plan. In 2021, while the rest of the world suffered from what seemed like an unstoppable spread of new variants, China seemed to have largely returned to normal life. Their covid-related deaths make up a small fraction of deaths in the rest of the world. Now, while throughout 2022 other places have learned to live with the virus, China's policy against covid, starting with the confinement of Shanghai, the country's main business center, has given the impression that it was taking carried out in a completely disorganized and repressive manner. Citizens have been subjected to endless tests. Businesses and residential areas may be closed without notice. Travel between cities and provinces has become very difficult, with each local government applying its own version of the restrictions.
Rumors of reopening have been circulating for weeks and make Chinese stocks seem like they are riding a roller coaster. On November 11, the central government released a list of 20 measures aimed at relaxing various restrictions, such as removing the quarantine obligation for secondary contacts and reducing the quarantine of travelers arriving at a country from seven to five days. place. Stock markets received the measures as a sign that the country planned to gradually abandon the zero covid policy. However, the Chinese leadership did not intend to send that signal. The relaxation was just a policy adjustment surely intended to make it more bearable for a longer period. Still, the relaxations have been applied unevenly. And, as the number of cases has risen in many cities, local officials have once again imposed blanket and arbitrary lockdowns.
The pressure is mounting on many fronts, and the leadership in Beijing must face the idea that they will eventually lose control over the virus and over the patience of the population. The path they must follow is confusing. Few analysts believe that China is preparing for an imminent reopening. Instead, many envision an immediate future marked by a period of chaos and painful political missteps. It is expected that for at least the next four months, or until a major political meeting is held in March, the leaders of Beijing will maintain the zero covid measures while trying to refine them. That situation could continue for much of 2023 if central government authorities fail to devise an exit strategy.
Under such conditions, the outlook for the economy is bleak. Closures of businesses, residential areas and even entire districts are likely to continue, although a total lockdown of a city could be avoided. It is also possible for local officials to impose lockdowns without formally announcing them in an attempt to give the impression that they are upholding the new easing measures. All of this will only add to the confusion. Many of the current problems for airlines and movie theaters are likely to persist and spill over to other consumer-facing businesses.
Multinational companies can count on continued disruptions. And also US consumers buying a new phone will suffer from the zero covid policy. The recent lockdown at a Chinese plant that assembles iPhones has caused serious disruption for Apple. The factory, which employs 200,000 workers and is owned by the Taiwanese company Foxconn, suffered an outbreak in October that forced a partial lockdown. Food began to run out. The garbage accumulated. At the beginning of November, many employees decided to flee, jumping over the fences that surrounded them and walking along the highways with the intention of returning to their homes.
To address the labor shortage, officials in Henan province, where the factory is located, have staffed production lines using low-level Communist Party officials as Foxconn tries to hire more workers. Production is likely to remain insufficient.
An even more chaotic 2023 cannot be ruled out in which infections run rampant and the authorities are forced to abandon the zero covid policy. Many observers are seduced by the prospects of an end (planned or forced) to that policy. Some have come to imagine that the country will transition from its current ossified state to business as usual with minimal interruption between the two phases. That optimistic vision does not take into account what could become one of the biggest public health disorders in recent times in the world: a great outbreak of cases in a population that has barely known the virus.
Such a period could include a general reduction in commercial activity. Both merchants and buyers could decide to shelter at home. Factories will temporarily stop working if contagions spread through production plants. Political confusion and inconsistencies between counties, cities and provinces will paralyze supply chains for weeks. Some local officials, who have been trained over the past three years to avoid Covid cases at all costs, are likely to resort to covert lockdowns to slow the spread. Those conditions, if the transmission of the virus occurs fairly quickly, could last at least a quarter. Nomura's Ting Lu says that at that stage, regions with lockdowns could account for as much as 40% of GDP, with output falling for a quarter or two.
Even if China were to immediately end the zero-covid policy, the positive economic effects are likely not to be felt until 2024, analysts at consultancy Capital Economics say. The intervening period would be a period of turmoil and instability. Growth would be low, and depending on how restrictions are enforced by local authorities, protests may well continue.
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Translation: Juan Gabriel López Guix
