If it wasn’t clear before COVID-19 hit, it is now apparent that Xi Jinping, China’s top leader, does not prize economic growth above social and political factors. In fact, growth appears to be further down on China’s agenda than it has been in several decades. We can conclude this since China is still following a zero-COVID policy despite the reduction of COVID-related restrictions in the West.
To some extent, this makes sense, as China remains vulnerable; 38 percent of its population above 60 has not been fully vaccinated, and Chinese inactivated vaccines have been shown to be less effective than mRNA vaccines developed in the West. Scientists have strongly encouraged China to use alternative vaccines. Still, COVID-19 has taken a toll on China’s economic growth, with no end in sight. This underscores China’s transition away from a nation trying to keep up with its East Asian neighbors and Western counterparts into a more inward-looking, less market-oriented society.
China’s slowing growth due to COVID-19 lockdown policies has been well recorded in the media. In recent months, as major cities were placed on lockdown, China’s economy faced stark declines in GDP growth, declining by 2.6 percent in the second quarter of this year. This represented the slowest growth since the pandemic began. Production declined and logistics firms faced challenges in carrying out daily activities. In fact, one Hong Kong-based economist estimated that lockdowns cost China 3.1 percent of GDP per month, assuming the highest GDP contributing cities are under quarantine.
In the third quarter, some lockdowns occurred during July in Lanzhou, Wugang, some locations of Shanghai and Wuhan, and elsewhere. While lockdowns were not as widespread in July as they were in the second quarter, cities are on the alert to new cases, and climbs in the prevalence of COVID-19 cases can result in larger lockdowns at any time.
China’s zero-COVID policy is an extreme reversal of policies that aimed to foment growth in the 1990s and 2000s even at the expense of the environment and the well-being of the labor force. Although this trend of encouraging growth at any cost continued somewhat into the 2010s, it now appears that this is no longer expected.
What is more, Chinese households that – until COVID-19 hit – had been trained to buy more and keep up with their developed-country peers in looks and lifestyle have found their ability to purchase goods and services severely curtailed under lockdown. Consumers were limited in their ability to access stores and even receive online deliveries during lockdown, resulting in sharp drop-offs in consumption. This is an interesting phenomenon, as Chinese leaders have repeatedly called for households to consume ever more to bolster the economy. However now this eminent policy goal has taken a back seat to stamping out the spread of COVID-19.
Unfortunately, this trend looks set to continue. This is because firms, concerned about the potential for China to enter severe lockdown mode once again, are investing and hiring less. This will mean lower or stagnant incomes for existing workers and less employment, which is particularly problematic for the youth at present.
Foreign companies are also slashing investment to lower levels and expecting lower revenue due to the prospect of ongoing lockdowns, and some of them are looking to diversify production centers outside of China to other Asian nations. One survey reported that almost 60 percent of European businesses stated they were cutting revenue projections for 2022, which does not bode well for China’s attractiveness to overseas firms. The China that once opened up special economic zones to produce goods mainly for export and created a unique environment catering to hosting foreign businesses is becoming ever less important to Beijing.
The one area that Chinese policymakers do seem genuinely concerned about is real estate. China’s real estate market is suffering, as house prices decline. What is more, homebuyers have threatened to stop paying mortgages on unfinished housing projects across the nation, leading to extreme cash flow problems among already-indebted property developers. This issue is important because it has resulted in social unrest, which Communist Party leaders are quick to quell to maintain social stability. To this end, Beijing has directed banks to bail out property developers. The aim here is not to promote economic reform and growth in this industry per se but to prevent social disruption.
Zero-COVID China is a different China than what onlookers have become accustomed to. No longer is China seeking growth at any price – in fact, it has taken a more extreme, hypercautious stance on conquering COVID. Lower growth is certainly in the cards, and when growth will pop back up at the very top of the agenda is anyone’s guess.