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#studentviews: How is China’s lockdown policy affecting the world economy?

Compared with many other countries, China’s zero-Covid policy has been effective at limiting the spread of the disease and the death toll. But it has also weakened the country’s economy, damaged global supply chains and contributed to rising inflation across the world.

‘It becomes a ghost city again’, said He Min, deputy general manager of Hohhot International Airport in northern China. Another outbreak of Covid-19 had recently begun in the province of Inner Mongolia, starting on 4 October 2022.

The capital city, Hohhot, experienced the worst effects, with a total of 3,935 cases. All flights were cancelled over one week due to the rise in infections, including among airport staff. The whole city was under lockdown.

Until recently, China has been following a zero-Covid policy. Following the initial outbreak in early 2020, the Chinese Communist Party has enacted mass PCR testing, severe lockdowns, isolation and quarantine rules, and border closures in an attempt to maintain an infection rate close to zero.

People's daily lives are controlled by a colour code system indicating their health status: green, yellow or red. An individual’s colour is shown on a smartphone application, and automatically turns red without a negative PCR test in the last 72 hours. Only those with green status can access all locations.

China has chosen health over the economy. The country's official death toll from Covid-19 is 5,235 (as of December 2022), compared with 212,766 in the UK, which has a population 20 times smaller. While the veracity of official figures has been questioned, China’s authoritarian crackdown has clearly been effective at limiting the spread of the disease.

But the country’s economy has continued to suffer due to the prolonged shutdowns. GDP fell by 2.6% in the three months to June 2022. The world's second largest economy grew by only 0.4% in June 2022 compared with 2021, failing to meet expectations of 1% growth. This is attributed to the zero-Covid policy.

According to economists from the Chinese University of Hong Kong, China's lockdowns are costing at least $46 billion a month, or about 3.1% of total national output. The data come from various industries, including civil aviation, services and tourism.

China's civil aviation industry has suffered a drastic decline. On 1 May 2021, passenger numbers were restricted to 40% on every flight, severely harming profitability. Airlines have also been prohibited from operating routes if passengers test positive for Covid-19 after arriving.

During the Omicron wave from late 2021, 142 international flights were being barred per week. This has been contributing to a decline in tourism. An Oxford Economics report suggests that outbound travel from China is recovering but still much more slowly than in the other four largest pre-pandemic international sources of ‘outbound trips’ (the United States, the UK, Germany and France). Chinese tourism exports in 2026 are forecast to remain 50% lower than in 2009.

The Chinese restaurant and food service industry has also experienced a sharp decline in sales. Total revenue was 44% lower in the first quarter of 2022, compared with 2021. Meanwhile, UK restaurants have recovered from being 74% below in the second quarter of 2020, to currently being 16% higher than before the pandemic.

Wang Yao, director at the Central University of Finance and Economics, says ‘difficult approval processes for employees, applications to return to work and a lack of consumer trust are the biggest challenges we are facing.’

Even worse than measurable GDP impacts are the costs of removing people’s social freedoms. People are social animals, so taking away their right to have contact with those outside their immediate families can harm their mental wellbeing.

China’s domestic troubles are also threatening the global economy on two fronts. First, weaker Chinese demand harms export industries across the world, in sectors ranging from commodities to luxury products.

Second, the zero-Covid policy is creating a supply chain crisis. China accounts for almost a third of global manufacturing output. When a Chinese factory or port is closed, businesses and consumers across the world feel the effects.

 Globalised ‘just-in-time’ supply chains are not resilient enough to deal with Chinese lockdowns. This is contributing to levels of inflation not seen since the 1980s in some countries, and the resulting tightening of monetary policy that hurts businesses and households with mortgages.

Economists evaluate public policy using cost-benefit analysis. For zero-Covid, this means estimating both the benefits of reduced mortality from the virus and the costs to economic activity and social freedom – and seeing whether the overall impact is positive.

In Western countries, vaccines long ago tipped the scales in favour of removing lockdowns. Perhaps China did not follow suit because it places a higher value on human life or a lower value on social freedom – in either case, its decision is having a disastrous impact on the world economy.

Author: Yige Wang
Editor’s note: This article is from the University of Bristol’s communicating economics class of 2022-23.
Picture by Robert Way on iStock
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