China’s economy stumbles in the fog of Covid war


China’s economic engine has been howling in recent months, hurt by lockdowns imposed to contain the spread of Covid. Home sales plummeted. Many shops and restaurants in some cities are closed, some maybe for good. Youth unemployment rose.

The delay has cast doubt on the viability of China’s rigorous strategy to eradicate virtually all Covid infections – whether the cure will outweigh the social and economic costs of restrictions. But on a recent visit to Wuhan, the city where the pandemic first struck, Chinese leader Xi Jinping said fighting Covid remained paramount.

“It would be better to have a small temporary impact on economic development, rather than let the public’s physical safety and health suffer,” Mr Xi said, state media reported. He cited the need to protect both older adults and children from infection, and warned officials to grow weary of the lingering two-and-a-half-year war against Covid. “Perseverance,” he said, “is victory.”

That elusive victory over Covid has been complicated by the fast-moving Omicron variant — and its sub-variant, BA.5, whose first domestic cases surfaced in China last week — slipping through the country’s many defenses.

A month after Shanghai lifted the citywide lockdown, new Covid cases have surfaced there in recent days, prompting officials to order many of the city’s 25 million residents to undergo tests. Eastern China’s Anhui province has virtually shut down two provinces, and neighboring Jiangsu province, a manufacturing hub, is trying to contain new infections. Xi’an, a city of 13 million, has closed schools and many businesses after a flare-up.

Like hitting flies with a shovel, China’s Covid strategy can be effective, but can also be expensive and controversial. It involves shutting down condominiums, neighborhoods, or even entire cities for days or weeks to wipe out even a handful of cases. As a result, Xi’s insistence on Covid zero, or “dynamic zero” as Beijing calls it, has cast a disturbing shadow over the country’s economic expectations.

The Chinese government is expected to release key economic data for the second quarter of this year on Friday. According to a Bloomberg survey, economists expect the Chinese government to report gross domestic product growth of about 1 percent in the second quarter compared to the same period a year earlier. That’s a sharp drop from growth of 4.8 percent in the first quarter and is likely to push the government’s full-year growth target of 5.5 percent out of reach.

“Uncertainty is the main factor harming our national economic development,” Yang Weimin, an economist who advises the Chinese government, said in a speech to property developers in late June, citing questions about Covid and pandemic prevention measures. He also pointed to investors’ caution after cracking down on companies accused of abusing market dominance, violating regulatory bodies or violating official moral codes.

“Uncertainty is the great enemy of action,” said Mr. Yang.

Mr Xi wants officials to put out Covid outbreaks while supporting the economy. In Wuhan, he visited a laser equipment factory, which hailed the potential of new technologies, and also visited a neighborhood promoted as a model of effective Covid controls.

In practice, officials are grappling with the varying demands of Covid controls and economic recovery. The resulting tensions weigh on China months before a Communist Party congress, when Mr Xi is almost certain to win another five-year term as party leader, consolidating his status as the most powerful leader since Deng Xiaoping and Mao Zedong. .

Beijing has sought to boost business and consumer confidence so that they spend, invest and travel. But local officials, faced with the threat of being fired for failing to comply with pandemic controls, are often imposing additional controls and restrictions on travelers and transportation, adding to disruption and uncertainty.

“Often, the heads of various departments and companies attend a meeting in the morning on improving the dynamic zero, and then in the afternoon on economic growth,” said Wu Qiang, an independent political commentator in Beijing.

“The tensions fit into Xi’s own model for running the country,” he said. “The tensions really take off from him.”

Over the past two years, many Chinese have accepted the Covid restrictions as annoying but necessary. But workers and employers seem increasingly impatient about lockdowns, controls and uncertainties, especially when they have to pay loans, rent and wages.

“The local government certainly said they would get to zero in half a month, but I don’t think half a month will be enough,” Wang Yongguan, who earns his living from grouting walls, said in a telephone interview from Sixian. County in Anhui Province, which went into lockdown. He was also concerned about the associated decline in home sales. “This year will not be good. It wasn’t to begin with.”

Policymakers seeking to bolster investor confidence also fear they will be accused of undermining Mr Xi’s policy of cleaning up companies accused of malpractice and reckless investment, said Christopher K. Johnson, the president of the China Strategies Group, citing talks with officials in Beijing.

“Does the boss really want to give in to some of these repressions, or is it temporary?” said Mr Johnson, referring to Mr Xi. “There is a lot of uncertainty.”

China’s stop-start Covid restrictions may continue at least next year, in part because the government has focused on restrictions and testing over vaccinations. The elderly have a relatively low vaccination coverage. China’s leadership has so far refused to approve more effective vaccines developed abroad — a decision motivated by political pride rather than medical considerations, many experts say.

But Chinese leaders also worry that a deep delay could lead to social discontent, a fear exacerbated by the approaching party congress. Officials are under particular pressure to contain unemployment, which rose to 18.4 percent in May among city dwellers aged 16 to 24, according to China’s National Bureau of Statistics. More than 10 million graduates, a record number, are joining the job search this year. Others will seek refuge in graduate school.

Even in Beijing, which has avoided a city closure by imposing only limited restrictions, things can be difficult. Wang Jing said his restaurant, in an alleyway usually packed with tourists, had lost more than 90 percent of its income in May when Beijing banned dining in restaurants. Limits eased in early June, but only about a third of sales bounced back.

“This year is without a doubt the toughest we’ve had,” he said. “All my waiters have been with me for over 10 years. They have young and old to take care of and wait for me to hand out wages. How can I ever fire them?”

China is heading for some policy compromises. Officials cut in half the days of quarantine imposed on international travelers and close contacts to try to reduce some of the nuisance. Mr Xi and the Prime Minister, Li Keqiang, have also indirectly suggested that the annual growth rate could be lower than the government’s 5.5 percent target earlier this year. Some former officials and policy advisers have openly said businesses need more clarity to support an economic recovery.

“Our hearts cannot ride on waves, bob up and down. That is bad for economic growth and social development,” Hu Deping, former vice chairman of the All-China General Chamber of Industry and Commerce, said in a speech to private Chinese entrepreneurs in June. “Entrepreneurs only gain trust if there are no inconsistencies in the policy.”

Even if China is able to contain Covid without shutting down major cities, the pent-up uncertainty is prompting some companies to rethink their plans.

Business was good for Citrosuco, a Brazilian juicer, until Shanghai closed in April. The containers of frozen orange juice were in the city’s port, held up by customs inspectors checking goods for the presence of the virus, said Joshua Lim, a chief executive of the company in the city.

Clearing customs and getting the juice shipments to the warehouses, which usually takes three to four days, took two weeks, he said. Citrosuco bosses in Brazil have begun to reassess China’s prospects, he said.

“They ask questions like, how can we better protect our business?” he said. “If we invest now, what will the payback period look like and what other risks will we be caught off guard for?”

Joy DongZixu WangLi YouClaire Fu and Liu Yi contributed to research and reporting.

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