Can China Manage the Economic Side Effects of Lockdowns?

Welcome to Foreign Policy’s China Brief.

The highlights this week: China’s economy suffers as the threat of lockdowns looms, U.S. health advisor Anthony Fauci criticizes Beijing’s COVID-19 policy, and Macao grapples with another crisis.

If you would like to receive China Brief in your inbox every Wednesday, please sign up here.

As parts of China lock down in response to rising COVID-19 cases, its economy is struggling to cope. Outside analysts have rapidly revised the country’s expected growth rates. Along with the direct consequences of the ongoing closure of Shanghai, China’s biggest financial hub, the public fears that further lockdowns are on the way, since the government remains committed to its zero-COVID policy.

Despite recording total cases in the low hundreds, Beijing has so far avoided a complete lockdown, although public transport, school systems, and other services are closed to help forestall further outbreaks. But some analysts have raised questions about the description of Beijing’s cases. Only about 10 percent of cases in Beijing are described as asymptomatic, while the majority of cases in Shanghai are classified that way.

The outbreaks, combined with global pressures such as Russia’s war in Ukraine, are taking an economic toll in China. Urban youth unemployment has passed 16 percent, up from around 10 percent before the pandemic, when new graduates were already struggling to find jobs. That is a political concern, too: Leaders in Beijing understand that unemployed young people helped drive so-called color revolutions in the post-Soviet world.

China’s overall unemployment rate—5.8 percent—is not as bad, but even people who have jobs are experiencing significant economic pain. Chinese firms tend to pass their problems directly on to their employees, thanks to the country’s lack of enforceable labor laws. Cutting salaries sharply or even not paying employees for months is common; it is already happening in Shanghai.

The question is whether these economic problems will last beyond the zero-COVID policy. Before the pandemic, there were already signs of slowdown, and the Chinese government’s political moves—such as its crackdown on the technology sector, one of the country’s most productive—have damaged economic growth. They also suggest the state has little appetite for any economic reform that might put limits on the Chinese Communist Party’s power.

China is still a long way off from a recession, but economic stagnation is particularly painful for a country accustomed to quick growth, as it has become in recent decades. The impacts are likely to be sharper in some regions than in others: The northeast, once the country’s manufacturing hub, has suffered economically since 2016, causing the population there to shrink by 10 percent between 2016 and 2020.

The boom times shaped Chinese financial decision-making, from the propensity to quit jobs with the expectation that another opportunity would present itself to investments based on the conviction that housing prices could only ever go up. (However, one thing that the boom-time mentality never disrupted was China’s sky-high savings rate.) Economic growth also encouraged risk, because even if people invested in a project that went broke, they assumed that the government had the resources—and the fear of instability—to step in and bail them out.

This attitude goes along with the idea that China was being restored to its natural place in the world; Chinese President Xi Jinping has put the same rhetoric at the core of his goals for national greatness and a “moderately prosperous society.” Meanwhile, domestic economists who have warned of a slowdown, such as Hong Hao, have seen their online presence deleted.

That puts Xi in a no-win situation right now. Going back on the zero-COVID policy risks devastating outbreaks, but it also means taking a sharp political hit, since the government has publicly recommitted itself to the strategy. But sticking to zero-COVID puts long-pledged economic goals out of reach.

Fauci slams China’s COVID-19 policy. Anthony Fauci, the director of the U.S. National Institute of Allergy and Infectious Diseases and chief medical advisor to U.S. President Joe Biden, has criticized China’s rigidity in sticking to its zero-COVID policy. In an interview with FP this week, he called the current situation in Shanghai and likely in Beijing a “disaster.” The statement could provoke heated words from China, along with another push for the conspiracy theories directed against Western-made vaccines—especially since Fauci also criticized Chinese-made vaccines for being “not as effective” as others.

When it comes to relative handling of the virus, it’s important to remember that the United States is still recording an average of between 350 and 400 deaths from COVID-19 per day. That said, China’s numbers—which claim only a handful of deaths from the recent outbreaks—look increasingly unreliable, with reports that deaths, especially those in nursing homes, have been attributed to other causes.

China isn’t prepared for the heat. As India bakes under a deadly and record-breaking heat wave, Chinese scientists are worried about their own country’s future—especially in the North China Plain, which includes Beijing. The capital already has the unfortunate aspect of being freezing cold in the winter, averaging 17 degrees Fahrenheit, and sweltering in the summer, often topping 100 degrees. Extreme temperatures in Beijing kill a daily average of 100 people, according to a recent study.

The North China Plain, one of the country’s most populated regions, could see the deadliest conditions of any part of the planet by the end of the century. But the crisis has already begun: Heat waves kill four times as many people in China as they did in 1990. China is considerably richer than India, but its population is also older, making them more vulnerable to such disasters.

Macao faces a crisis. The region most badly hit by China’s economic problems remains the island of Macao, Hong Kong’s often overlooked neighbor. Macao’s economy depends heavily on tourism and gambling, which is legal there—as well as unofficially on money laundering from the mainland. On paper, Macao is one of the richest areas in the world, although it strikingly unequal.

After major losses in 2020, when its economy contracted by a whopping 56 percent, Macao was on the way to recovery, even with a mainland-prompted crackdown on crime hitting its casino moguls. The omicron variant and resulting lockdowns have undone that progress: April’s figures show a 68 percent decline in gaming income, which makes up around half of the island’s economy. Other gambling hubs that target Chinese tourists, such as Singapore and Australia, may benefit.

Hikvision sanctions. The Biden administration is reportedly planning heavy sanctions against Hikvision, a surveillance company entangled in state atrocities in Xinjiang. The measures go beyond even those brought against the Chinese telecommunication giant Huawei. The Hikvision sanctions, likely implemented on human rights grounds under the 2016 Global Magnitsky Act, would affect any company doing business with the surveillance firm, which supplies cameras to cities and towns worldwide.

The move is a sign that U.S. sanctions use continues to expand, with techniques honed in one area—such as those against Russia—later applied to others.

Which Ma got arrested? Alibaba shares took a tumble on Tuesday after police in Hangzhou, where the company is headquartered, said they had arrested a man with the surname Ma on national security grounds. Many people immediately assumed the report referred to Jack Ma, the company’s billionaire founder, who has been in Beijing’s black books for more than two years. But it turns out the police arrested a different Ma—one with three characters in his name as opposed to Jack Ma’s two.

Alibaba is one of the main focuses of the government’s crackdown on the technology industry. Although the crackdown is economically costly, it has created genuine opportunities as former monopolies crumble. For example, the ride-hailing giant Didi has lost 30 percent of its customers as regional competitors increasingly eat into its market after government targeting.