China’s widespread lockdowns will have an economic impact
Nearly 400 million people are estimated to be in some form of lockdown in China as authorities try to stop a rapidly evolving Omicron outbreak that is beginning to weigh on the world‘s second-largest economy.
Hundreds of thousands of people have been sent to isolation centers in China, and millions more have been told to stay at home. Officials in dozens of cities have halted normal daily life across the country in a race to track and trace the coronavirus and stamp out China’s worst outbreak since the pandemic began.
Japanese bank Nomura has estimated that 373 million people in 45 Chinese cities are under some kind of lockdown, about a third of the population and equivalent to about $7.2 trillion in annual gross domestic product.
It’s part of a pandemic strategy that is increasingly at odds with China’s own economic growth expectations — a strategy that has prompted economists and even the country’s prime minister to sound the alarm.
Experts are beginning to warn that China’s target of 5.5% economic growth for 2022 is now unrealistic as much of daily economic life has come to a standstill. Li Keqiang, the prime minister, on Monday alerted local officials to the mounting economic cost of each new coronavirus outbreak, urging authorities to balance pandemic control measures with the need to encourage growth.
“It is necessary to coordinate epidemic prevention and control and economic and social development,” Li said, according to state media.
China has reported more than 350,000 locally transmitted cases of the virus since its last outbreak emerged in March. While that may not seem like a large number for a country that has battled an outbreak of the highly contagious variant of Omicron, China is still pursuing a strategy that aims to completely eradicate the virus, driven in part by concerns over its older, unvaccinated population. Some 40 million people over the age of 60 have still not received a Covid shot.
China’s response to its latest outbreak is also starting to impact the global supply chain, as factories that make iPhones, electric cars and semiconductors have had to shut down operations. Some critical components cannot be trucked from ports to factories due to roadblocks and strict Covid testing requirements.
Pegatron, a major producer of Apple’s iPhone, said this week that two of its factories in China had halted production “in response to local government Covid-19 prevention requirements”. German auto parts maker Bosch and automaker Tesla are among other global companies that have had to suspend operations because truck drivers are required to show negative test results within 48 hours to enter cities like Shanghai.
In some places where no cases have been reported, officials have set up roadblocks, leading the State Council, China’s cabinet, to tell local authorities this week not to obstruct major roads , ports and airports.
Efforts to prevent an epidemic are creating such a big problem that economists have lowered their expectations for China’s economic output this year. An economist has gone so far as to predict that China could enter a recession in the coming months.
Beijing has made a zero-tolerance policy toward the coronavirus and epidemics a priority, said Ting Lu, chief China economist at Nomura.
“The problem is that when you set that kind of policy goal, local governments compete with each other,” he said. The consequence of this competition is that local governments will step up their own pandemic policies to ensure that they do not risk an epidemic that is difficult to control. For example, officials in Guangzhou, a city of 15 million, began citywide testing after finding 20 local cases last week.
“If all local governments do it this way, then the whole economy would be in trouble,” Lu said, adding, “The whole system will amplify this zero Covid strategy.”