China’s economic engine has faltered in recent months, hurt by lockdowns imposed to limit the spread of Covid. Home sales fell. Many shops and restaurants in some cities are closed, some maybe forever. Youth unemployment has risen.
The delay has raised doubts about the viability of China’s strict strategy to eliminate almost all Covid infections – whether treatment is becoming worse than the social and economic costs of the restrictions. But on a recent visit to Wuhan, the city where the pandemic first spread, Chinese leader Xi Jinping said that putting out Covid remains a top priority.
“It would be preferable to have a small temporary impact on economic development rather than let the physical safety and health of the public suffer,” Mr Xi said, state media reported. He cited the need to protect the elderly as well as children from infection and warned officials not to become complacent in the grueling two-and-a-half-year war against Covid. “Persistence,” he said, “is victory.”
That elusive victory over Covid has been hampered by the rapidly developing Omicron variant — and its BA.5 sub-variant, whose first domestic cases emerged last week in China — slipping past the country’s many defenses.
A month after Shanghai lifted its city-wide lockdown, new cases of Covid have emerged there in recent days, prompting authorities to order many of the city’s 25 million residents to be tested. Anhui province in eastern China has imposed a virtual lockdown on two counties, and neighboring Jiangsu province, a manufacturing heartland, is struggling to contain new infections. Xi’an, a city of 13 million, closed schools and many businesses after an outbreak.
Like killing flies with a shovel, China’s Covid strategy may be effective, but it’s also expensive and controversial. This involves locking down blocks of flats, neighborhoods or even entire cities for days or weeks to eliminate even a handful of cases. As a result, Mr Xi’s insistence on Covid zero, or “dynamic zero”, as Beijing calls it, has cast a worrying shadow over the country’s economic prospects.
The Chinese government is due to release key economic data for the second quarter of this year on Friday. According to a Bloomberg survey, economists expect the Chinese government to report that gross domestic product grew by about 1 percent in the second quarter compared with the same period a year earlier. That’s a big drop from growth of 4.8 percent in the first quarter and is likely to put the government’s target of 5.5 percent growth for the whole of this year out of reach.
“Uncertainty is the main factor harming our national economic development,” Yang Weimin, an economist who advises the Chinese government, said in a speech in late June to construction contractors, citing questions about Covid and pandemic prevention measures. He also pointed to investor caution following a crackdown on companies accused of abusing their market dominance, flouting regulators or breaching official moral codes.
“Uncertainty is the great enemy of action,” Mr Yang said.
Mr Xi wants officials to quell outbreaks of Covid while supporting the economy. In Wuhan, he visited a laser equipment factory, hailing the potential of the new technology, and also visited a neighborhood that has been touted as a model for effective Covid control.
In practice, officials are struggling with the various demands of Covid control and economic recovery. The resulting tension descends on China months before the Communist Party congress, when Mr Xi is all but certain to win another five-year term as party leader, consolidating his status as the most powerful leader since Deng Xiaoping and Mao Zedong.
Beijing has tried to boost confidence among entrepreneurs and consumers so they spend, invest and travel. But local officials, facing the threat of being fired over lapses in pandemic control, often impose extra checks and restrictions on passengers and transport, adding to disruptions and uncertainty.
“Often, the heads of various departments and companies attend a meeting in the morning to improve the dynamic zero, and in the afternoon to a meeting on economic growth,” said Wu Chiang, an independent political commentator in Beijing.
“The tension is within Xi’s own model of running the country,” he said. “The tension really comes from it.”
Over the past two years, many Chinese have accepted the Covid restrictions as annoying but necessary. But employees and employers seem increasingly impatient with lockdowns, checks and uncertainty, especially when they have to pay loans, rents and salaries.
“The local government said for sure they will get to zero in half a month, but I think half a month will not be enough,” Wang Yongguan, who makes a living grouting walls, said in a telephone interview from Cixian County in Anhui Province , which went into lockdown. He also worries about the accompanying decline in home sales. “This year will not be good. It wasn’t from the beginning.”
Policymakers trying to shore up investor confidence also fear being accused of undermining Mr. Xi’s policies to clean up companies accused of abuses and reckless investment, said Christopher K. Johnson, president of China Strategies Group, citing conversations with officials in Beijing.
“Does the boss really want to back down on some of these crackdowns or is it temporary?” Mr. Johnson said, referring to Mr. Xi. “There’s a lot of uncertainty.”
China’s Covid restrictions may continue for at least next year, in part as the government focuses on restrictions and testing on vaccinations. Older people have a relatively low percentage of people vaccinated. China’s leadership has so far refused to approve more effective vaccines developed abroad, a decision driven by political pride rather than medical considerations, many experts say.
Yet China’s leaders also worry that a deep slowdown could fuel social discontent, an anxiety heightened by the upcoming party congress. Authorities are under particular pressure to curb unemployment, which among urban residents aged 16 to 24 rose to 18.4 percent in May, according to China’s National Bureau of Statistics. More than 10 million college graduates, a record number, are joining the job search this year. Others will find refuge in graduate school.
Even in Beijing, which avoided a citywide shutdown by imposing only limited restrictions, business can be tough. Wang Jing said his restaurant in a street usually crowded with tourists lost more than 90 percent of its revenue in May when Beijing banned dining in restaurants. Restrictions were eased in early June, but only about a third of businesses have returned.
“This year is certainly the hardest we’ve had,” he said. “All my waiters have been with me for over 10 years. They have young and old to care for and they are waiting for me to issue wages. How could I fire them?’
China is moving towards some political compromises. Officials have halved the days of quarantine imposed on international travelers and close contacts to try to reduce some of the disruption. Mr. Xi and Premier Li Keqiang have also hinted that annual growth may be lower than the 5.5 percent target set by the government earlier this year. Some former officials and political advisers have openly said that businesses need more clarity to sustain an economic recovery.
“Our hearts cannot ride on waves, bouncing up and down. This is bad for economic growth and social development,” Hu Deping, former vice chairman of the All-China General Chamber of Industry and Commerce, said in a speech to Chinese private enterprise owners in June. “Entrepreneurs will only gain confidence when there is no political controversy.”
Even if China manages to contain Covid without putting major cities under lockdown, the mounting uncertainty is causing some companies to rethink their plans.
For Citrosuco, a Brazilian juice maker, business was going well until Shanghai was blocked in April. Its containers of frozen orange juice sat at the city’s port, detained by customs inspectors checking the goods for the virus, said Joshua Lim, the company’s general manager in the city.
Clearing customs and getting the juice shipments to warehouses, which normally takes three to four days, took two weeks, he said. Citrosuco bosses in Brazil have begun to reassess China’s prospects, he said.
“They’re asking questions like, how can we better protect our business?” he said. “If we invest now, what will the payoff look like and what other risks will we be blindsided by?”
Joy Dong, Zixu Wang, Li You, Claire Fu, and Liu Yi contributed research and reports.
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