China’s Economic Data Hints at Cost of Zero Covid Strategy

BEIJING — Faced with its worst Covid-19 outbreak yet, China has been enforcing an expanding number of mass quarantines, strict lockdowns and border controls. The measures may yet work, but official data released on Monday show they are exacting a grim toll on the world’s second-largest economy.

China’s economy expanded 4.8 percent in the first three months of this year compared to the same period last year. That pace was barely faster than the final three months of last year, and it also obscured a looming problem.

Much of that growth was recorded in January and February. Last month, economic activity slowed as Shenzhen, the technology hub in the south, and then Shanghai, the country’s biggest city, and other important industrial centers shut down. The lockdowns suspended assembly lines, grounded workers, trapped truck drivers and snarled ports. They confined hundreds of millions of consumers at home.

Retail sales, a crucial sign of whether consumers are spending, fell 3.5 percent in March from a year ago, the National Bureau of Statistics said on Monday. Factory output grew 5 percent, a rate that was slower than the pace recorded in the first two months. Imports, which had been racing ahead in the first two months of the year, fell slightly last month, partly because of transportation snags.

A worker in protective gear was one of the few people out during the lockdown in Shanghai last week.Credit…Hector Retamal/Agence France-Presse — Getty Images

The slowdown that started in March is expected to worsen this month, with even more regions placed under restrictions. This is bad news for China’s leaders, who have set a target of “about 5.5percent”growth for the year.

Premier Li Keqiang called for “a sense of urgency” a week ago in telling local officials to limit the effects of Covid shutdowns on the economy. China’s central bank acted on Friday to help commercial banks lend more to promote economic growth.

For the world, China’s Covid shutdowns could feed inflation by further disrupting the supply chains that many manufacturers rely on, pushing up the cost of making and transporting goods. A sluggish China would also import less from other nations, whether it is natural resources like oil and iron ore or consumer goods like cherries or designer handbags.

“Talking about the impact of the pandemic outlook on Shanghai and Shenzhen, we cannot forget that they are important parts of the entire supply chain and it will have certainly have an effect on the whole circle of the entire Chinese economy,” Yao Jingyuan, a former chief economist of the National Bureau of Statistics who is now a cabinet adviser, said at a news conference last Wednesday.

Executives in the auto industry and tech sector, two of China’s biggest employers, have begun warning in recent days of crippling disruption to their nationwide operations if Shanghai, in particular, cannot reopen soon. The city manufactures many high-tech components that are crucial to many supply chains.

“Shanghai is a hub for international car companies — if the hub fails, the whole system won’t work,” Cui Dongshu, the secretary general of the China Passenger Car Association, said in a telephone interview.

Lockdowns Cripple Local Economies

By April 11, 87 of China’s 100 largest cities had imposed some form of restriction on movement, according to Gavekal Dragonomics, an independent economic research firm that has been tracking lockdowns. These ranged from limiting who can enter or leave a city to full lockdowns as in Shanghai, where most residents have not been allowed to leave their homes even to buy food.

Yang Degang, the manager of a factory that makes plastic molding machines in Zhangjiagang, 70 miles from Shanghai, was forced to halt operations after his town imposed a lockdown on Wednesday.

Employees working on a plastic flooring production line at a factory in Zhangjiagang, in China, in 2019.Credit…Aly Song/Reuters

Even before the lockdown, the authorities had imposed restrictions that were preventing the movement of trucks. This meant Mr. Yang couldn’t get components on time to build his machines and could not deliver finished equipment to many factories and ports in lockdowns.

Mr. Yang said he did not know when he could reopen. “Zhangjiagang is under huge pressure,” he said. “I worry about losses, but there is no other way.”

But while more and more cities are imposing lockdowns — Taiyuan, the hub of China’s coal industry, joined the list last Thursday — the stringency of municipal lockdowns has weakened a little lately. From the end of March through last Wednesday, the number of large cities with severe lockdowns fell to six from 14, according to Gavekal. The share of China’s economic output represented by these cities shrank to 8 percent, from 14 percent.

Beijing has ordered local governments to help trucks reach their destinations and take other measures to shield the economy from harm during lockdowns. Nio, an electric carmaker in Hefei in central China, halted car assembly on April 9. Hefei was not locked down, but crucial components suppliers were in Shanghai, Jilin and elsewhere. By last Thursday, however, the company had obtained enough car parts to resume limited production.

Workers Face Difficulties

Many workers are struggling as well. Truck drivers, for example, face the constant danger of weekslong quarantines, for which they are often not paid even as interest payments on their trucks keep falling due.

The Latest on China: Key Things to Know

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The war in Ukraine. China’s officials and its media are increasingly repeating the Kremlin’s narrative about the conflict. This joint propaganda has undercut Western efforts to isolate Russia diplomatically and has found a receptive audience in the Middle East, Africa and Latin America.

Relations with Europe. Chinese leaders have often viewed Europe as the softer wing of the Western world, unable and unwilling to contest China’s rise. But as the continent reassesses its security needs, that may change — and lead to a more antagonistic stance.

A strict Covid policy. As China grapples with its worst Covid-19 outbreak since the beginning of the pandemic, the government is following a “zero Covid” strategy. The approach has put hundreds of millions of people’s lives on pause and could have far-reaching effects.

A pause on wealth redistribution. For much of last year, China’s top leader, Xi Jinping, waged a fierce campaign to narrow social inequalities and usher in a new era of “common prosperity.” Now, as the economic outlook is increasingly clouded, the Communist Party is putting its campaign on the back burner.

Yu Yao, a truck driver who delivers vegetables and fruits from Shandong Province to Shanghai, is one of many Chinese truck drivers stranded because of ever-tightening epidemic control measures. He has been trapped in Shanghai for more than three weeks.

Community workers unloading daily supplies during the lockdown in Pudong district in Shanghai.Credit…Liu Jin/Agence France-Presse — Getty Images

Mr. Yu came to Shanghai on March 16 to deliver vegetables to a market. He was still in the city three days later when the authorities identified him as a close contact of an infected person in the market. The police ordered him to be immediately quarantined. So he stopped his truck near a highway and began to wait.

He has been waiting ever since. No one has fetched him for quarantine. He lacks a travel permit now required to drive a truck in Shanghai during the lockdown. He and four other drivers without travel permits have slept on the ground and shared bread for three weeks.

“We can’t get off the highway, every exit is guarded. We just want to go home,” Mr. Yu said. “I couldn’t get enough food the other day, and my body can’t take it anymore.”

Surviving on Exports

One area of China’s economy continued to barrel along in the first three months of this year: exports. Chinese factories have grabbed a considerably larger share of world markets during the pandemic, including a jump of 14.7 percent in exports in March from a year ago. Many multinational companies continue to depend on large networks of components suppliers in China.

But as China keeps disrupting production by imposing stringent lockdowns with no warning, at least a few importers in the West are starting to look elsewhere for supplies. Jake Phipps, the founder of Phipps & Company, an American importer and distributor of home furnishings that sells to hotel and apartment developers, said that in the past two years he had been shifting many orders away from China.

He has started buying kitchen cabinets from Vietnam and Turkey, vinyl flooring from Vietnam and India and stainless steel sinks from Malaysia. China’s repeated lockdowns have delayed too many shipments, including a lockdown in part of Ningbo, near Shanghai, that delayed his shipment of plumbing supplies last month. Many customers are now wary of relying on China because of tariffs, geopolitical tensions and questions about China’s possible role in the origins of the coronavirus, he added.

Trucks at a container terminal at a port in Ningbo in eastern China last year.Credit…Reuters

“Reliability has made me move, and the comfort of customers not wanting to order from China,” Mr. Phipps said.

Li You contributed research.

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