Political or Economic Calculus?

Since COVID-19 first broke out in Wuhan, Chinese government responses have centered on non-medical/pharmaceutical interventions: restricting human movement, increasing social distancing, and early discovery and quarantine of positive cases were all enshrined as wide-ranging and absolute imperatives. Chinese media defends this approach by highlighting the deficiencies in pandemic management in Western countries and high death rates.

To promote nationalist sentiment and support the Chinese vaccine industry, China refrained from granting authorization to more-effective mRNA vaccines. Over the past year or so, various coercive means have been employed to make the country take domestically produced inactivated virus vaccines such as Sinovac. China’s inoculation rates are now some of the highest in the world, but data from Hong Kong shows that two or even three shots of Sinovac provide much weaker protection against Omicron than the BioNTech / Pfizer vaccine. Consequently, faced with the faster transmission rates of the Omicron variant, shorter incubation period, and lower risks of serious disease and death, China cannot take a more flexible approach to its stringent control measures. Instead, the government, feeling obliged to plow ahead with ‘dynamic zero-covid’, targets much larger areas with rapid ‘containment’ tactics, and maximizes restrictions on the movement of people and goods.

From a purely epidemiological point of view, isolation and quarantine can play a significant part in stopping the virus from spreading, but it must be taken into account that human mobility is a social and economic phenomenon. China’s campaign-style pandemic control system consists of three pillars: mass PCR testing of entire populations, ‘static management’ imposed on entire areas, and wholesale confinement of people in temporary ‘Fangcang’ hospitals. The issue is that these should be temporary measures to buy time for mass vaccination to be carried out, but there has been mission creep and they have become permanent. With the economic downturn irreversible, they are now held up as a new symbol of the ‘strengths’ of the Chinese system. Whereas, the Western response to the pandemic is interpreted as a disaster and evidence of “Western decline”. According to this logic, the economy is a price worth paying for political goals. 

Shanghai’s 50-day lockdown in 2022 disrupted world supply chains and left Western investors concerned. But the regions all around China suffering from the same lockdown and isolation measures, some for months on end, has been internationally much less noticed. As of the 11^th of September, 1276 high-risk areas have been declared nationwide, and 1442 as medium-risk ones. Being a ‘high-risk’ area means, under official rules, residents cannot leave their homes; in ‘medium-risk’ areas, residents are still confined to their residential compounds.

Take the city of Beihai, Guangxi Province. This popular southwestern coastal destination mostly depends on tourism and its fishing industry. The peak local holiday season was cut short on 12 July by an Omicron outbreak with over 700 infections in seven days. What would be considered a minuscule event in other countries was treated as a major incident in zero-covid-obsessed China. The performance of local officials is now measured by their loyalty to the zero-covid policy, so they must take any measures possible to secure their positions.

Beihai authorities sealed off all tourist areas and broke the city down into a 5240-zone grid through which “a dragnet-style virus screening [was] carried out of the city’s 1.856 million population, assisted by Big Data”. Police worked 24-hour shifts, and traffic was banned while the urban population underwent several rounds of compulsory PCR testing. In early August, a Beihai resident lodged a complaint letter with the State Council’s “Internet+ Supervision” website: “I urge you to cancel the pandemic measures and lift restrictions, we are really on the brink now … can the government not think of the ordinary people? Lots of people are left with no income now. When is this endless series of pandemic measures going to stop? Are we going to be locked down for the rest of our lives? Why are other countries all able to reopen, is it only the Chinese who are smart, and all the others are dumb?” The complaint letter quickly disappeared without trace online. The fishing season usually opens on August 16^th in Beihai, but the authorities extended the catch moratorium for a month, causing angry residents to hit the streets in protest; this compelled the authorities to announce a complete relaxation of restrictions at midnight that evening.

But Beihai was the exception. It is also wishful thinking to expect China to abandon the zero-covid policy after the 20^th Party Congress later this year, as that would be to ignore how central political legitimacy and place in history are to the image of a Chinese leader. Although the principle of performance legitimacy has been cemented over the past decades of Reform and Opening-up, given the material prosperity they unleashed, when political and economic objectives happen to be at odds or come into conflict, the former gets priority. The Chinese party-state can handle economic weakness, for example, by espousing the concept of a “new normal” to explain away weaker growth in recent years, but it cannot stomach the idea of a political challenge. The crackdowns on private entrepreneurs such as Jack Ma or key industries such as the tech sector provide proof of the latter.

The economic cost of zero-covid

What has the economic cost been of the political campaign against COVID? Research by Michael Song, Professor of Economics at the Chinese University of Hong Kong suggests that a two-week lockdown caused economic damage equivalent to around 32% of Hong Kong’s GDP for that month or 2.7% of GDP for that year. While a month-long lockdown would cost 4.5% of the city’s annual GDP.  Relaxation of lockdowns, while allowing the economy to recover to its pre-lockdown levels, would not lead to a bounce-back effect. This research was carried out before Shenzhen and Shanghai lockdowns; if we run the calculations for the latter two conurbations, the cost of a two-week lockdown would roughly equate to 190 billion yuan (27 billion euros), a colossal sum. The brutal economic consequences of China’s zero-covid policies for the country and the world are evident with the effects of Shanghai’s two-month lockdown.

The Yangtze River Delta, a cluster of cities centering around Shanghai, is a major world auto manufacturing hub. The automotive supply chain suffered the furthest-reaching consequences since automotive supply chains are a complex and finely calibrated ecosystem where one vehicle requires more than 10,000 parts to make. Supply chains are long, highly globalized, and involve low inventories of parts, so they are highly coordinated; if any one humble part is unavailable, production grinds to a halt. Shanghai produces 11% of the cars in China. Over half the world’s major part makers have headquarters or major production clustered around Shanghai: Tier 1 part suppliers, chipmakers, Tier 2 and 3 suppliers such as producers of instrument panels, seats, and tires, and raw material suppliers such as metal and glass. There are over 1000 companies of significant size in the local auto supply chain; that number swells to over 20,000 once small and micro-enterprises are included.

Logistics is the lubricant that keeps the cogs of the automotive supply chain running. With no logistics, auto makers’ capacities would be diminished. For example, Shanghai’s neighboring provinces Zhejiang and Jiangsu imposed heavy restrictions from late March to late June: the number of available motorway tollbooths and service areas was reduced, and frequent spot-checks of haulers’ traffic permits, health QR codes, and PCR results were carried out. As a result, many trucks ceased operations or were left unable to exit the motorway. The automotive supply chain foundered due to companies being unable to get supplies in, get their products out, or pay transport costs that outstripped the relevant part manufacturing costs.

To name a few, Tesla, NIO, and SAIC-Volkswagen (Volkswagen's joint venture in Shanghai) had to announce pauses in their car output due to the Shanghai lockdown. The scale of the resulting economic damage is evident in the Tesla figures: factory idle for 24 days, 48,000 fewer cars produced, and at least 14 billion yuan in loss of revenue.

Shanghai municipal authorities tried to restart manufacturing using a ‘whitelist’ on 16 April, authorizing certain companies to reopen operations. 666 companies were whitelisted, the largest category among whom (251) was the automotive industry, over 80% of whose facilities had gone into full idling mode. One week later, a city government press conference claimed that 70% of the 666 companies listed had resumed production and that improvements had occurred in automotive company productivity and capacity utilization. This claim was bureaucratic sleight of hand; no specifics were given in terms of how many cars had rolled off the line, how many had been dispatched from the factory gates, or which cities they had been delivered to. Restarting a factory is not just a matter of flicking a switch to get back to full speed; for example, Shanghai Volkswagen had only got back up to 50% capacity utilization at its various plants by the end of May, and Bosch, the world’s largest auto part supplier had only got its various part lines back running at 30-75% of capacity by the middle of that month.

Given the continued uncertainty posed by the zero-covid policy and the possibility of different grades of the local lockdown imposed at any time, the Chinese automotive supply chain is unlikely to see manufacturing activity return to pre-pandemic levels. Ongoing challenges for the auto industry include adjusting to shifting downstream demand, getting staff back in place, and logistics bottlenecks.

Working under the New Normal

Another challenge in getting back to business is pandemic rule compliance with company staff. Shanghai Municipality announced a rule in April that companies restarting operations would have to carry out and log health checks for all their staff: antigen tests for all in the morning, PCR tests in the evening. Physical separation was required between zones, and all staff was required to stick to designated workstations and sleeping quarters, to minimize contact between staff in different zones.

This requirement proved difficult to implement. Different regulators applied different standards. Residents’ Committees (the lowest level of the governance apparatus) were sometimes unwilling to recognize documentation issued by employers attesting to the need for their workers to leave home and come in, as the Residents’ Committees were under a lot of political pressure to prioritize pandemic control. This led to situations where management staff in residential compounds refused to let residents leave, and coaches sent by the company were unable to bring their employees back in. With the considerable bureaucracy involved and general low efficiency, the actual attendance rate by workers was very low, and even those permitted to come in were not allowed back to their homes, effectively having to ‘live at the factory.’

Shanghai’s SAIC-Volkswagen started ‘closed-loop management’ (封闭管理）on March 14^th, as reported by Chinese media, with over 8000 staff eating and sleeping at their workplace. Some employees suddenly received overtime notices as they approached the end of their shifts. They did not realize that the half-hour of overtime would mutate into several weeks of confinement in their factory. The company laid out camp beds, tents, and yoga mats for their staff, who were expected all to ‘sleep neatly in rows’ at night. During the lockdown, each person worked around 10-hour shifts.