Economic data from China points to the cost of the Zero Covid strategy

BEIJING — Facing its worst Covid-19 outbreak to date, China has imposed an increasing number of mass quarantines, strict lockdowns and border controls. The measures may still work, but official data released on Monday shows they are weighing heavily on the world’s second-largest economy.

China’s economy grew 4.8 percent in the first three months of this year compared to the same period last year. This pace was only slightly faster than the last three months of last year, and it also masked a looming problem.

Much of this growth was recorded in January and February. Last month, economic activity slowed with the closure of Shenzhen, the southern technology hub, then Shanghai, the country’s largest city, and other major industrial hubs. The shutdowns have suspended assembly lines, grounded workers, trapped truckers and blocked ports. They have confined hundreds of millions of consumers to their homes.

Retail sales, a crucial sign of whether consumers are spending, fell 3.5% in March from a year ago, the National Bureau of Statistics said Monday. Factory output rose 5%, a slower pace than in the first two months. Imports, which had accelerated in the first two months of the year, fell slightly last month, partly due to transport problems.

The slowdown that began in March is expected to worsen this month, with even more regions under restrictions. This is bad news for Chinese leaders, who have set themselves a target “of about 5.5 percent” growth for the year.

A week ago, Premier Li Keqiang called for “a sense of urgency” as he told local officials to limit the effects of Covid shutdowns on the economy. China’s central bank acted on Friday to help commercial banks lend more to promote economic growth.

For the world, the Covid shutdowns in China could fuel inflation by further disrupting supply chains that many manufacturers rely on, increasing the cost of manufacturing and transporting goods. A slow China would also import less from other countries, whether natural resources like oil and iron ore or consumer goods like cherries or designer handbags.

“Talking about the impact of the pandemic outlook on Shanghai and Shenzhen, we cannot forget that they are important parts of the whole supply chain and it will certainly have an effect on the whole circle of the entire Chinese economy,” Yao Jingyuan, a former chief economist at the National Bureau of Statistics who is now an adviser to the cabinet, said at a press conference last Wednesday.

Leaders of the auto industry and the technology sector, two of China’s biggest employers, have begun warning in recent days of crippling disruptions to their domestic operations if Shanghai, in particular, cannot reopen soon. The city manufactures many high-tech components that are crucial to many supply chains.

“Shanghai is a hub for international automakers – if the hub breaks down, the whole system won’t work,” Cui Dongshu, general secretary of the China Passenger Car Association, said in a phone interview.

As of April 11, 87 of China’s 100 largest cities had imposed some form of restriction on movement, according to Gavekal Dragonomics, an independent economic research firm that has tracked lockdowns. These ranged from limiting who can enter or leave a city to complete lockdowns like in Shanghai, where most residents have not been allowed to leave their homes even to buy food.

Yang Degang, the manager of a factory that makes plastic molding machinery in Zhangjiagang, 70 miles from Shanghai, was forced to halt operations after his city imposed a lockdown on Wednesday.

Even before the lockdown, authorities had imposed restrictions that prevented truck traffic. This meant that Mr. Yang could not obtain components in time to build his machines and could not deliver finished equipment to numerous factories and ports under lockdown.

Mr. Yang said he didn’t know when he might reopen. “Zhangjiagang is under enormous pressure,” he said. “I’m worried about losses, but there’s no other way.”

But as more cities impose lockdowns – Taiyuan, the hub of China’s coal industry, joined the list last Thursday – the stringency of city lockdowns has eased a bit lately. From late March to last Wednesday, the number of major cities under severe lockdown fell to six from 14, according to Gavekal. The share of Chinese economic output represented by these cities fell from 14% to 8%.

Beijing has ordered local governments to help trucks reach their destinations and take other measures to protect the economy from damage during the shutdowns. Nio, an electric car maker in Hefei, central China, halted car assembly on April 9. Hefei was not on lockdown, but crucial component suppliers were in Shanghai, Jilin and elsewhere. As of Thursday, however, the company had secured enough auto parts to resume limited production.

Many workers are also struggling. Truckers, for example, face the constant danger of weeks-long quarantines, for which they often go unpaid even though interest payments on their trucks continue to be due.

Yu Yao, a truck driver who delivers vegetables and fruits from Shandong province to Shanghai, is one of many Chinese truck drivers stranded due to increasingly strict epidemic control measures. He has been trapped in Shanghai for over three weeks.

Mr. Yu came to Shanghai on March 16 to deliver vegetables to a market. He was still in the city three days later when authorities identified him as a close contact of an infected person at the market. The police ordered that he be quarantined immediately. So he stopped his truck near a highway and started waiting.

He has been waiting ever since. No one came to pick him up for quarantine. He does not have a travel permit now required to drive a truck in Shanghai during the lockdown. He and four other drivers without travel permits slept on the floor and shared bread for three weeks.

“We can’t leave the highway, every exit is guarded. We just want to go home,” Mr. Yu said. “I couldn’t eat enough the other day, and my body can’t take it anymore.”

One sector of the Chinese economy continued to thrive in the first three months of this year: exports. Chinese factories have cornered a significantly larger share of global markets during the pandemic, including a 14.7% jump in exports in March from a year ago. Many multinational companies continue to depend on extensive networks of component suppliers in China.

But as China continues to disrupt production by imposing strict shutdowns without warning, at least a few Western importers are starting to look elsewhere for supplies. Jake Phipps, the founder of Phipps & Company, an American importer and distributor of home furnishings that sells to hotel and apartment developers, said that over the past two years he had shifted many orders out of China.

He started buying kitchen cabinets from Vietnam and Turkey, vinyl flooring from Vietnam and India, and stainless steel sinks from Malaysia. China’s repeated shutdowns have delayed too many shipments, including a shutdown in part of Ningbo near Shanghai that delayed its shipment of plumbing supplies last month. Many customers are now hesitant to rely on China due to tariffs, geopolitical tensions and questions about China’s possible role in the origins of the coronavirus, he added.

“The reliability got me moving, and the convenience of customers who don’t want to order from China,” Phipps said.

Li you contributed to the research.

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