China

Under pressure

The People’s Republic is not making friends via its Covid policies

The Winter Olympics are over, but China appears to be staying largely closed as it continues to pursue its zero-Covid policy. Consequently, there is little good news for foreign manufacturers, shippers, logistics operations or investors hoping the various squeezes on their businesses and supply chains will ease. Even without the adverse effects of Covid-19 China’s current five-year economic plan emphasises “high-quality” economic growth – basically less focus on GDP growth overall, and more on its composition. However, the Chinese economy’s isolation from the western economies seems to be growing and is also becoming more obviously oriented towards the Russian economy.

China’s economy has remained robust despite pandemic-related factory closures, port delays combined with shortages of some key components (semi-conductors particularly), many companies and sectors with unsustainably high levels of debt (property being the largest and most obvious example, but not the only one), and dampened demand for Chinese-made goods in overseas markets hit by Covid-19, inflation and sharply rising living costs are eroding consumer spending levels.

So, despite a lot of rebalancing over the last decade, away from simply manufacturing to becoming a consumption engine, China’s traditional growth model based on exports, infrastructure and real estate investment is now a bust. Beijing needs to continue to up consumer spending, control rampant debt and move towards a significantly less carbon-intensive economy. Global economic problems, in many cases, but requiring Chinaspecific responses.

For most readers supply chains will continue to be an issue throughout 2022 at least. The Bank of Korea noted how much the recent lockdown in Tianjin and Xian affected trade: “Production lines and logistics facilities are being underused to add to supply chain uncertainties,” BoK said, adding, “Samsung Electronics is located in Xian, LG Electronics, Volkswagen and Toyota are located in Tianjin, both regions were recently shut down due to omicron, and the shutdown temporarily reduced their manufacturing operations.”

Still, despite Covid-19 China is still planning to improve logistics in the longer term. On January 18, China’s State Council released the fourteenth five-year plan for improving its transportation system. This plan includes additional improvements to the eight “vertical” (north-south) and also the eight “horizontal” (east-west) high-speed railways which aim to eliminate bottlenecks in regular speed railways. The plan also envisages improvements in the infrastructure of suburban railways to match those within and between major metropolises, multimodal freight transportation, and specialised transportation services. There is also a lot of talk about intelligent transportation technology and low-carbon transportation as well.

Despite China seemingly managing to reduce its exposure to Covid-19, many global institutions are now trying to apply pressure on Beijing to move away from its Zero Covid policy to a more liberal and open regime while some firms are leaving altogether (see chart). Both the Bank of Japan and the International Monetary Fund (IMF) have called on China to open up to a greater level to improve the supply chain shortages (Japanese car manufacturers are suffering under the current policies). The IMF has noted the circularity of the zero-Covid policy – lockdowns and restrictions reduce production; shortages mean prices rise internationally; order levels fall. A trap China should be keen to avoid. ●

Foreign businesses planning to leave China, December 2021

Region plan to leave plan to stay total

US businesses 13 87 100

EU businesses

11 89 100 Japanese businesses 4 96 100

Source: National Bureau of Statistics, China