The Zero-Covid policy is the main uncertainty behind China’s outlook

Regional focus: The Zero-Covid policy is the main uncertainty behind China’s outlook

By Hugh Burke, CEO, Asia Pacific Region, Coface

Omicron hit China in February and its high transmissibility pushed daily new infections rapidly higher through March and April. Many cities across the country began imposing pandemic control measures and restrictions; 87 of China’s top 100 cities, which accounted for 70% of its GDP, have imposed some form of quarantine restrictions where harsh

measures were on the rise by early April. The widespread use of quarantine measures to achieve ‘dynamic zero-covid’ entails significant impacts on the economy. In cities under the most severe restrictions (e.g. city-wide lockdown), enterprises’ operations were suspended, non-essential employees had to stay home, logistics and warehouse services were seriously disrupted, all of which contributed to the recent economic downturn.

On 24 May, the State Council has announced 33 policy measures under six areas to boost the economy, and infrastructure investment was among them.

Despite significant economic costs, China is unlikely to change its dynamic zero-covid policy as it would be unaffordable. A study by Fudan University, published in Nature Medicine, concluded that abandoning the zerocovid policy could result in 112 million infections, and 1.6 million deaths. Given the high transmission rate of Omicron and the low efficacy of vaccines in reducing infections, China will need to continue imposing highpressure restrictions, keeping it in a dilemma of choosing between a very strict zero-COVID policy (with continuous constraints on economic activities) or a severe Omicron outbreak and/ or widespread of other new highly transmissible variants (which would lead to a new wave of disruptions to economic activities).

We expect the second quarter to be a difficult one for China, and therefore have adjusted our 2022 GDP Industrial production suffered from its first decline in two years and dropped by an annual rate of 2.9% in April; of which, the deepest contractions was recorded in Shanghai (-62.9%), Jilin (-41.7%) , and Beijing (-31.1%). Significant negative effects were noted in the service sector with activities contracting sharply beginning April. Despite seaports remaining opened, land logistics were disrupted, as reflected by the Logistics Prosperity Index (LPI), indicating a marked deterioration around business conditions within the logistics sector. The capacity of trucking services was substantially reduced as truckers were required to take a nucleic acid test and demonstrated proof of negative results to receive permission to drive.

The sharp reduction in economic activities adversely impacted the labour markets as well. The surveyed urban unemployment rate rose to 6.1% in April, just a whisker below the 6.2% recorded at the onset of the pandemic in February 2020. While the current omicron wave is largely being brought under control into June, resulting in an easing of covid restrictions in cities with a controllable number of infections, the emergence of new clusters prompted authorities to announce fresh mass testing for parts of Shanghai and Beijing, just days after restrictions were relaxed. The re-imposition of COVID measures reflected the difficulty in pursuing a zero-covid policy against the highly transmissible Omicron variant, increasing economic risks for China. Therefore, authorities were increasingly vocal in efforts to stabilize the economy, protect livelihoods, and ensure smooth industrial supply chains.

forecast for China from 5.4% to 4.4%. This

growth projection is susceptible to significant downside risk due to the likelihood of new lockdowns.

Sectors that already saw lengthy payment delays in 2021 will be especially vulnerable to new headwinds. According to our latest China Corporate Payment Survey, construction, transport, energy, metal and agri-food sectors are the top five with the longest overdue payments. Apart from the

uncertainty related to zero-covid measures, rising raw material prices are increasingly a threat to corporate margins.

While we remain sanguine about China’s growth story, the world’s second-largest economy is facing significant headwinds to growth in the short term, including a property sector downturn, the pursuit of zero-covid policy, weak