The Shanghai COVID lockdown is over but its economic problems aren’t

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Shanghai’s covid lockdown is over. Its economic problems aren’t.

When the end came for Shanghai’s covid lockdown — at the stroke of midnight on June 1 — it was met with cheerful reunions and Champagne toasts across the city. And for good reason. For two months, the 25 million residents of this famously vibrant, high-wattage metropolis had been confined to their homes as the government fought to contain China’s largest outbreak. The nation’s hard-line zero-covid policy had brought Shanghai to a standstill. Only essential workers were allowed to venture out. Businesses were shuttered, and supply chains broke down.

The reopening came as daily cases of the virus hovered near zero, and it means that people can once again roam freely, and businesses can reopen — though residents will still be required to have a covid test every 72 hours.

When it comes to the human cost — in terms of public health and the trauma of trying to obtain food and medicine — the worst has passed. But the longer-term impact of Shanghai’s lockdown will be felt in other ways and not only in the city. Sources told Grid that many of the economic problems generated by the lockdown are profound and cannot be erased overnight. Chinese officials remain committed to the same zero-covid policy that shut Shanghai down; that casts uncertainty over the city’s return to normalcy and the entire country’s economic trajectory as well.

“The truth is that the reopening is a positive sign for markets, but you can’t take it as a given that things will just move in a linear direction positively,” Shehzad Qazi, managing director at China Beige Book, a data analytics firm, told Grid. “Covid outbreaks can very quickly lead to reversals.”

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Meanwhile, Shanghai’s economic uncertainty is symptomatic of troubles zero-covid has caused across the country and amount to a major challenge for the Chinese government. As China’s President Xi Jinping seeks to secure a third term in November, the growing toll of the pandemic will have political implications as well.

“The long-term significance is even more serious,” Daniel Rosen, CEO of the Rhodium Group, which tracks the Chinese economy, told Grid. “The lockdowns have revealed the eroding capacity of the Chinese system to make good choices between economic welfare and political pride and the severe slowing that results when politics predominates in modern China.”

For Shanghai, two months of economic damage

During the two months of lockdown, nearly every sector of Shanghai’s economy was hit hard.

Initially, many of the city’s factories ground to a halt. To help restart production, the government allowed some companies to enter a “closed loop” — a policy that was used to manage the February Beijing Winter Olympics. After clearing a covid test, workers at factories (Tesla’s was a much-covered example) lived on site. Scientists at some pharmaceutical companies slept in their labs to continue product testing. But even with these measures, industrial production fell across Shanghai and the Yangtze Delta region as workers got sick, others stayed home and supply chains were fractured.

Shanghai’s service sector — which in recent years has accounted for an estimated 70 percent of the city’s GDP — took a big hit as well. Many nonessential businesses including beauty parlors and the city’s popular coffee shops were forced to close. Eliza Jiao, the CEO of Personalively, a “new retail” company, told Grid the lockdown disrupted her business in ways great and small. Her company’s cash flow was interrupted because it wasn’t possible to process invoices from home, they couldn’t develop new business leads, and an in-person pop-up sales event for a client was canceled. Meanwhile, some of their clients’ e-commerce supply chains were impacted, so Jiao had to reduce order volume and refund some purchases.

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Shanghai’s low-income population felt the pain of the lockdown most acutely. Xu Qiangwei, a young migrant worker employed in a Shanghai car factory, told the World of Chinese that an outbreak there had slowed production, cutting into his paycheck. “Because of the pandemic, I only worked half of last month and haven’t been paid yet. I’ve already spent all my money since this outbreak started.”

After one of his roommates tested positive, Xu was locked down in his room and went hungry for two days because the workers’ dorm received no food deliveries from the government, and skyrocketing prices made it impossible for him to buy food. “After this outbreak is over, I want to go home,” he said. “At home, at least I won’t go hungry.”

After the lockdown, the long-term pain

As the city reopens, the Shanghai government has rolled out a slew of measures — from business tax breaks to consumer subsidies — to help boost the economy.

But the latest news from the city suggests the road to recovery will be steep. Tesla’s Shanghai factory is operating at only 70 percent of capacity — one of many cases of factories struggling to get back to work due to labor and supply chain issues. Manufacturing executives in Shanghai told the South China Morning Post in May that layoffs would be necessary even after the lockdown, because of losses they had incurred.

Among those recovery measures, the Shanghai government announced that all the city’s businesses could reopen without applying for a permit. But some firms didn’t survive the two months of paralysis. A hairdresser broke down in tears telling the BBC that he had been forced to close his salon.

Even for those businesses that have made it through, it’s hardly smooth sailing. Jiao told Grid her office building still required an application for reopening, so her company hasn’t been able to return to in-person operations. “Even if the company reopens, there are some workers who still can’t leave their neighborhoods,” she said. “And some workers fear ‘if I come back to work, what if we get locked down at the office?’”

Jiao’s and other Shanghai businesses can’t just bounce back on a dime. Seasons dictate the fashion and luxury industries; the two-month, lockdown-driven setback means products will have to be sold at a discount, and orders for later this year have already been impacted. As Jiao put it, “all of 2022 basically won’t be good.”

Across Shanghai, consumer spending may remain limited due to ongoing covid restrictions. Beyond the mandatory testing, there is a requirement that every resident must show a green QR code (proof of a negative test) to enter buildings. Long lines for tests and fears of infection are keeping some people from venturing out, even though the lockdown is technically over.

Beyond Shanghai: Zero-covid vs. China’s economy

Shanghai’s lockdown and the nationwide restrictions have already infected the broader Chinese economy. According to Japanese financial services firm Nomura, 130 million people remain under full or partial lockdown in China.

Data from the National Bureau of Statistics of China showed that manufacturing and services made a slight comeback in May compared to April, but these sectors were still in contraction. Company surveys indicate that supply chains are recovering, and analysts are hopeful that June will deliver better economic news as the reopenings continue in Shanghai and Beijing, where a partial lockdown had been in place.


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But the broader picture remains gloomy. China has targeted 5.5 percent GDP growth for this year, but Barclays recently projected the economy would hit only 3.3 percent. Consumer confidence has taken a double hit — from the lockdowns, as well as the ongoing uncertainty that the zero-covid policy brings. Fears of the next lockdown mean that small businesses are less likely to take risks, and fewer residents are spending heavily or taking out mortgages. Home sales are falling, more so than at the beginning of the pandemic. In the China Beige Book’s surveys, companies are reporting interest in relocating outside China. Apple has decided to move some of its iPad manufacturing from China to Vietnam, for instance, after supply chain snags this spring.

One more major red flag: Youth employment in China has risen to 18 percent, just as 11 million young people are graduating from the country’s universities.

The political toll

These economic headwinds would be challenging for any leader, at any moment. But they happen to be hitting just months before a critical meeting of the Chinese party leadership — a moment when Xi is expected to be given a third term at the helm. Xi has stood firmly and publicly behind the zero-covid policy, and he has given his blessing for the country’s economic targets. Now it is possible that his covid-zero approach will be the reason that those targets are missed.

“The immediate impact of the lockdowns was a gaping bite out of current economic activity, such as zero sales of automobiles in the city of Shanghai for a month or more,” said Rosen. “These hits jolted firms to attention like an economic defibrillator and settled the debate over whether China could reach its growth targets for the year: It could not.”

In some places, the frustration is already boiling over. Last week, a protest broke out in a satellite town outside Beijing, as people called for an end to restrictions that have prevented them from commuting into the capital for jobs.

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Chinese Premier Li Keqiang recently held a meeting for 100,000 government cadres in which he acknowledged that the economic picture is worse than at the start of the pandemic. The State Council, which Li leads, called for local governments to implement those 33 measures to help turn around the country’s financial outlook.

For all the signs of economic distress, the government remains locked into its zero-covid approach. It may be that having charted a course so publicly and aggressively, Xi is loath to tack in a different direction. And with that critical party congress approaching in November, officials have a mandate to keep covid under control. Xi and other party leaders have said that the country’s medical system would be overrun by omicron if the controls are loosened.

From this perspective, the other options are worse.

“The alternative to zero-covid, in the party’s own view of what could happen,” said Qazi, “is just more suffering and a more severe slowdown in growth or contraction in the economy.”

Thanks to Alicia Benjamin for copy editing this article.

  • Lili Pike
    Lili Pike

    China Reporter

    Lili Pike is a China reporter at Grid focused on climate change, technology and U.S.-China relations.

  • Tom Nagorski
    Tom Nagorski

    Global Editor

    Tom Nagorski is the global editor at Grid, where he oversees our coverage of global security, U.S.-China relations, migration trends, global economics and U.S. foreign policy.