China is in the midst of a “draconian” Zero Covid policy-induced lockdowns, leading to dragging down of demand and clogging supply, both within its country and more importantly, a Double Whammy to the entire global economy. Zero Covid means that Chinese authorities would not “tolerate” even a single infection of the Coronavirus and hence, to “keep the count down”, they have essentially locked down entire cities, including the commercially “vital” Shanghai and to some extent, its capital, Beijing, with Tier 2 metros under varying degrees of containment measures.
Industrial and commercial activity ceases when lockdowns happen, thereby impacting the production of goods and services, and to a lesser extent, the consumption patterns, as citizens buy only what is essential for everyday living. Factory shutdowns impact supply and no commercial activity drag down demand, thereby dealing a blow to both sides of the economic equation of Demand/Supply dynamics. While the internal compulsions and any strict measures are China’s problem as long as it affects the country alone, the fact that it is the world’s factory and a major consumer of everything from Oil and Coal to consumer goods and services means that its Zero Covid policy is now “our problem”.
Indeed, the severe supply chain crisis that the world is experiencing since last Christmas is mainly due to halted production or slower exports from China, which is now exacerbated by the Zero Covid induced slowdown, to the point where trade has come to a standstill. Worse, the “horror stories” emerging from the “isolated” citizenry (mostly through social media posts and videos, banned by the authorities, and somehow finding their way to the external world) portray a “nightmarish” nation on the edge and where hopelessness and helplessness are the order of the day. One shudders to think about the impact it is having on the Chinese and the world in general, if the present situation persists for a few more months, a very likely scenario, according to reports.
It is not only the Zero Covid policy that is resulting in demand destruction and cessation of supplies but also the ongoing “slow-motion” implosion of its real estate sector along with other parts of its economy. Indeed, ever since Evergrande, the largest and the most indebted of China’s property developers, went down, or so we are told, the crisis in its economy has been steadily reaching a boiling point and it remains to be seen as to whether China would go the Srilanka way. Maybe, Xi Jinping and his cohorts want to avoid a similar fate and hence, they are locking down their populace to submission, thereby seeking to avert a complete collapse of the economy and society.
Whatever be the motivation, China’s Zero Covid policy spells trouble for foreign multinationals doing business there. Either they move out permanently (a very unlikely scenario) or at least shift base to elsewhere temporarily, to let the storm subside and then return, if and when, things come back to normal. On the other hand, it is not easy (or indeed possible) for entire manufacturing facilities to be shut down and this is the “rub of the problem” as it presents a huge dilemma for the CEOs. It is also a significant drag on the global economy, especially at a time when the Ukrainian war has “disrupted” the world and led to a “partitioning” of the global economy into those for and against the war.
Continuing the point above, considering that China supported Russia in the initial month or so of the war, it is noteworthy that as the latter’s plans did not work out as expected, it remains to be seen whether Xi has blundered. Moreover, even Xi is attempting a record extension of his term in power, and so, all these aspects are interlinked. In addition, there is every reason to suspect that the severe restrictions on the Chinese citizenry are in preparation for something big, not apparent as the “opacity” with which the Middle Kingdom operates makes it difficult to surmise and predict their moves in advance.
So, what was in essence China’s problem, has become the world’s problem and the “new cold war” between the West and Russia is ensuring the Chinese and forcing them to take positions. As it is, US-China relations have always been a “love-hate” affair with successive American administrations welcoming trade but not the prospect of a superpower threatening their supremacy. What Trump started with his trade war now looks likely to force Biden’s hand in dealing with China. To conclude, if these trends continue beyond August, then we are in big trouble as a China in turmoil means that it would engulf the world in some sort of economic and geopolitical nightmare.