China’s Covid lockdowns a danger to global economy

Foreign firms that do business in China have learned a hard lesson: Beijing’s political needs will always trump economic policy. Minimising exposure is the only way to risk more trouble.

A resident gets a swab test at a Covid-19 test site in Beijing. Picture: Getty Images,

Beijing’s Covid lockdowns are an economic danger to China and everyone else, and the Communist Party seems to know it. Witness recent, belated attempts to pump up economic growth amid the zero-Covid policy disaster.

Large swathes of China have been under some form of lockdown in recent months. That includes Shanghai, a crucial commercial hub, which has yet to emerge from restrictions after a month. The government shows little sign of recalibrating even as other countries abandon lockdowns in favour of learning to live with the virus.

This self-inflicted disaster is a growing danger to the global economy. Any supply chain passing through China either has snapped already or is in danger of doing so. Beijing’s zero-Covid mistake is disrupting the supply of a wide range of goods for consumers elsewhere, and is prompting more companies to reconsider their China business.

Workers wear protective suits as they control the entrance area for deliveries and supplies around a community under lockdown. Picture: Getty Images.

The biggest risk, however, is to China’s own economy — and Beijing increasingly realises it. The country is all but certain to miss the Party’s 5.5 per cent economic-growth target for the year, and that already was a modest goal compared to years past. Surveys of business confidence and investment are dire and the property market continues to sink.

This is causing Beijing to worry about employment, with Premier Li Keqiang dispatched this weekend to demand that officials double down on job creation. Beijing’s main concern is social unrest if lockdowns pull prosperity out of the grasp of millions of Chinese waiting to move into the middle class.

The situation is dire enough that Beijing is exhorting the private economy to lead a turnaround. In recent years President Xi Jinping had tried to reduce the influence of private firms with a harsh and arbitrary regulatory crackdown, especially on tech firms.

A woman stands on the rooftop of a building during a Covid-19 coronavirus lockdown in the Jing'an district in Shanghai. Picture: AFP.

But in recent weeks, as he sees slow growth ahead of his expected coronation this fall to a third term, Mr. Xi has spoken of the virtues of private capital to fuel investment and growth. Mr. Li has chimed in with what’s billed as a jobs plan, featuring tax relief for private companies and pressure on banks to extend credit to small and medium-sized enterprises.

This is better economic policy, but businesses believe it at their own risk. Investors saw in last year’s tech crackdown how hostile Mr. Xi can be toward successful private companies. Traders in China’s highly speculative stock markets have been happy to play along with the recent change of heart, with tech stocks responding well. And Chinese firms, which have little choice but to endure, will welcome the political respite.

But foreign firms that do business in China, or rely on it for goods and components, have learned a hard lesson. The Communist Party’s political needs will always trump economic policy. If Mr. Xi decides to invade Taiwan, he won’t care about the damage to Western supply chains. Foreign companies need to minimise their exposure to China’s political vagaries or risk more business trouble ahead.

The Wall St Journal