CHINAMacroReporter

'Zero Covid' & the Shanghai lockdown

The impact on China’s economy, global supply chains, & foreign business in China

Joerg Wuttke is the president of the EU Chamber of Commerce in China - the 'official voice of European business in China.'
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CHINADebate

May 1, 2022
'Zero Covid' & the Shanghai lockdown
Joerg Wuttke, president of the EU Chamber of Commerce in China

The questions I get most these days:

  • ‘China has locked down Shanghai and Beijing looks next: Why is Xi Jinping holding fast to his Zero Covid policy in the face of its drastic impact on China’s economy?’ and
  • ‘What will that impact be for China’s economy, global supply chains, and foreign business in China?’

Rather than answer these myself, I now just send ‘China's Leadership Is Prisoner of Its Own Narrative,’ an interview with Joerg Wuttke in The Market, a leading German-language financial website – and a must-read.

  • Because this interview is both comprehensive and authoritative, today’s issue includes only Mr. Wuttke’s key insights from on-the-ground in China.

Joerg Wuttke is the president of the EU Chamber of Commerce in China -the 'official voice of European business in China.'

  • He has lived and worked in China for over 30 years.

Over those decades, he has dealt at the highest levels of the Chinese government and Party as well as the EU and member governments.

  • He is arguably the most influential foreign business leader in China.

But unlike so many fawning foreign business and financial people, Mr. Wuttke gives his take on any issue straight-from-the-shoulder.

  • This gives his comments a rare credibility.

His hand is always visible in the many excellent publications produced by the EU Chamber of Commerce in China.

  • You will find this terrific resource here.

Part One | The Politics of ‘Zero Covid’ & Lockdowns

1 | ‘Whack-a-Mole’

Q: ‘Shanghai has been in lockdown for a month. What's your assessment of why China is still relying on lockdowns?’

Mr. Wuttke: ‘The Omicron wave is like a game of whack-a-mole for China.’

  • ‘First Xian was locked down, then Shenzhen, then Shanghai, and so on.’
  • ‘Now we're all wondering what’s next.’

‘Here in China, the authorities always fall back to square one: lockdowns.’

2 | ‘Xi has maneuvered himself into a dead end’

Q: ‘Do you see any indication that the Zero Covid policy, which is behind the lockdowns, is being reconsidered?’

Mr. Wuttke: ‘No, nil.’

‘The authorities have made the Chinese population genuinely afraid of the virus.’

  • ‘The authorities do not inform that the Omicron variant is milder, they do not inform that other countries have learned to live with the virus - they can’t admit that people in Europe can fly on vacation again and live largely a normal life.’
  • ‘The authorities have spent a year bad-mouthing Western mRNA vaccines, with the result that people in China don’t trust the vaccination - and the authorities can’t admit that it would make sense to use mRNA vaccines in addition to the Chinese vaccines.’

‘For the past two years, the party leadership and government have spun the narrative that China has handled the pandemic much better than the decadent West.’

  • ‘Now this narrative is blowing up in their faces.’

‘President Xi wants to be confirmed for a third term at the 20th Party Congress in the fall, so he cannot change his narrative this close to the finish line.’

  • ‘Until the 20th Party Congress, they will stick to the Zero Covid policy.’

‘In short, President Xi has maneuvered himself into a dead-end:’

  • ‘He can’t change his Covid policy.’

3 | ‘Only one metric right now: Zero Covid.’

Q: ‘So given the choice between pandemic control and the economy, the economy gets the short end of the stick?’

Mr. Wuttke: ‘Yes.'

'The political signaling is clear:'

  • 'They don’t care about the economy in the short term.’

‘The mayors, the regional politicians, they all have only one metric right now:

  • ‘Zero Covid.’

‘The system’s focus on Zero Covid leads to many decision-makers being in a kind of self-destruction mode.’

‘Imagine you're a mayor of a medium-sized city and a truck comes with supplies for a local factory with parts from the Shanghai area.’

  • ‘Do you let the truck pass and run the risk that the driver will bring Omicron and you will have local contagions?’

‘You won’t get kicked out of your job if the economy in your area is doing poorly on average.’

  • ‘But you will lose your job if you have Covid in your city.’

‘Time and again you get confirmation from above:’

  • ‘If you have Covid in your city, you have a problem.’

4 | ‘Deaf ears’

Q: ‘Do officials understand the impact of Zero Covid?’

Mr. Wuttke: ‘I try to tell my contacts in the government that they could take an example from Singapore, where the government deals very pragmatically with the virus and society has learned to live with it.’

  • ‘Officially, this totally falls on deaf ears.’

‘But in closed meetings – especially in ministries that deal with the economy and businesses – I meet very well-informed and open-minded top politicians.’

  • ‘They know what Zero Covid means for the economy.’
  • ‘It’s just that they can’t use this knowledge to bring about policy change at the moment.’

‘In current politics, business people's messages hardly get through anymore.’

  • ‘Politicians’ fear is too great.’

Part Two | Impact of Zero Covid on China’s Economy

1 | ‘Growth will be below 4%; we don’t know how low.’

Q: ‘Officially, the government expects 5.5% GDP growth this year. Is that still realistic?’

Mr. Wuttke: ‘No.’

  • ‘2022 growth will be below 4%; we don’t know how low.’

‘The current lockdown is even more extreme than in early 2020.'

  • 'And the economy is crashing almost as hard.’

‘All signs indicate that the politicians do not want to solve the problem, but only to limit it.’

  • ‘I don’t see any vaccination campaign, no information campaign, no imports of mRNA vaccines, and I don’t see the population being told that society can live with it.’
  • ‘So I have to assume that Zero Covid will result in locking down this city and then that city on a monthly basis, at least until the Party Congress gives President Xi a third term.’

Q: ‘Did the downturn accelerate in April?’

Mr. Wuttke: ‘Yes, big time.’

‘GDP growth of 4.8% in the first quarter was probably already slightly managed upward.’

  • ‘But the real shocker will come with the data for April.’

‘Remember, 2021 was a banner year for China's economy, especially in the manufacturing sector.’

  • ‘January started at a high level, February and March were still okay.’
  • ‘But from March 28th, with Covid in Shanghai, everything collapsed.’

2 | Stimulus: ‘A band-aid for an amputation.’

Q: ‘To soften the blow, the government is trying to stimulate. Is it working?’

Mr. Wuttke: ‘The stimulus measures are like a band-aid for an amputation.’

‘The People's Bank of China pumps some liquidity into the system, money flows into infrastructure projects and state-owned enterprises receive support.’

  • ‘But that doesn’t get private companies and foreign corporations to invest again.

‘All over China, entrepreneurs look to Shanghai and have to deal with the scenario that the same thing could happen in their city.’

  • ‘So, until further notice, they hit the pause button and freeze almost all investment plans.’
  • ‘There’s no fiscal policy that can compensate for this restraint.’
  • ‘Investment ambitions will not come back until there is confidence that the Covid policy will change.’

Part Three | The Impact of Zero Covid on Supply Chains

1 | ‘Everyone is desperately trying to fill their warehouses.’

Q: ‘Is the Shanghai lockdown the main problem?’

Mr. Wuttke: ‘The problem goes far beyond Shanghai.’

  • ‘Supply chains within China are so tightly knit that lockdown measures in one place have ripple effects on other regions.’

‘Nationwide, freight volumes in April are down 15% year-on-year.’

  • ‘Freight traffic volumes in the Shanghai metropolitan area plunged by 81% year-on-year in the first three weeks of April.’
  • ‘Jiangsu province recorded a drop of 30%.’
  • ‘In Guangdong province, China’s economic powerhouse, freight volumes have plunged by 17%, even though there is no lockdown.’
  • ‘There are currently no trains running between Nanjing and Shanghai; the authorities in Nanjing are so riddled with fear that they won’t allow any traffic.’

‘I hear of car manufacturers that produce in Jiangsu province and are not directly affected by the lockdown.’

  • ‘But they can’t get parts from their hundreds of subcontractors, either because the subcontractors can’t produce or because shipments can’t get through the lockdown areas.’

‘Everyone is desperately trying to fill their warehouses.’

  • ‘The finely-tuned just-in-time processes are no longer working.’

‘These effects will only be seen in the economic data over the next few months.’

2 | ‘Ships are clogging up the waters off Shanghai.’

Q: ‘Will this mean continued production stoppages, clogged ports and strained supply chains?’

Mr. Wuttke: ‘Definitely.’

‘Shanghai has the largest port in the world.’

  • ‘It’s not in lockdown. It’s running quite well.’

‘But there are not enough trucks to clear the containers.’

  • ‘There is an acute shortage of drivers - they all leave because they are tired of being tested over and over again.’

‘Now ships are clogging up the waters off Shanghai.’

  • ‘Average waiting times for container ships there have tripled.’

‘Some are being diverted to Ningbo or Shenzhen.’

  • ‘But those ports can’t replace the big port in Shanghai.’

Part Four | Impact on Europe & Foreign Companies in China

1 | ‘Further shortages in the global supply chains.’

Q: ‘How is the impact being felt in Europe?’

Mr. Wuttke: ‘In Europe, you haven’t even begun to see the effects of these problems.’

  • ‘The ships coming into Europe today left Shanghai before the lockdown.’

‘Only in May and June will we see where the electronic equipment, the machine parts, the pharmaceutical precursors, and components are missing.’

  • ‘That will then lead to further shortages in the global supply chains.’

2 | ‘Foreign companies looking to other Asian countries for their sourcing.’

Q: ‘How are foreign companies in China reacting?’

Mr. Wuttke: ‘China is losing its credibility as the best sourcing location in the world.’

  • ‘China has lost its nimbus as a base for sourcing and manufacturing, at least for now.’

‘With the current situation in China comes a huge loss of confidence, which will eventually lead to changes in supply chains.’

  • ‘Foreign companies are not packing up and moving out of China, but they are considering moving parts of their investments to other countries.’

‘And I am now hearing from more and more foreign companies that they are trying to move their supply chains to other countries.’

  • ‘For the first time, I see a number of companies looking to other Asian countries for their sourcing.’

‘That means their sourcing will be more expensive, because you can’t simply replace the extremely efficient Chinese cluster in many areas.’

  • ‘But a more expensive sourcing is better than nothing.’

‘Also China maintains an extremely rigid travel policy.’

  • ‘As a CEO or as a purchasing manager, you can’t just fly quickly to Shanghai or to Guangzhou.’
  • ‘But today you can easily get to Jakarta, Kuala Lumpur or Manila.’

Part Five | ‘Prisoners of Their Own Narrative’

Q: ‘Do you see any prospects at all for market-friendly reforms in China?’

Mr. Wuttke: ‘My experience in China is that when things get really bad, the technocrats come in.’

  • ‘And they do make some reforms that are right.’

‘Perhaps there will be a rethink when the domestic economy hits rock bottom.’

  • ‘Perhaps they will realize in Beijing that they need foreign companies after all.’
  • ‘Perhaps they will then open the doors wider again.’
  • ‘But today, of course, we are not there yet.’

‘For now, China is not getting out of the corner the president has maneuvered the country into.’

  • ‘They are prisoners of their own narrative.’

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