This might sound dystopian or like a rerun of a story from the darkest days of 2020, but it is the reality that has faced the 25 million residents of Shanghai in China over the past month. Residents of Beijing are currently facing a similar fate with a mix of resignation, anxiety and dread.
President Xi Jinping’s obsessive zero-Covid policy does not just have implications for the unfortunate residents who are battling to secure groceries and are resorting to “mass buying” to have adequate nourishment, it will have global effects too. China’s economic ascendance has been the largest factor driving global GDP growth over the past 40 years. At the same time as the Federal Reserve in the US is hiking interest rates and withdrawing liquidity from financial markets to slow the economy, Xi is prioritising zero cases of Covid-19 at the possible expense of the country’s economic fortunes.
The stakes are high for Xi, who aims to secure an unprecedented third term as president of the Chinese Communist Party at its conference later this year. His carefully constructed image of being competent, largely because of his success in handling the pandemic in 2020, is starting to be called into question as he ham-fistedly tries to bludgeon the contagious Omicron variant into nonexistence, while potentially ruining the second-largest economy on Earth.
Governments in China do not enjoy the legitimacy that results from winning elections, the lifeblood of democratic systems. Instead, communist officials have often boasted that they have something superior: “performance legitimacy”, which flows from people feeling better off and livelihoods improving.
Signs are starting to show the pain that is being felt across the economy by the refusal to live with the virus. First has been the sudden weakening of the renminbi, the Chinese currency, which is down 4.2% this month against the dollar.
Promises of an infrastructure package to stimulate the economy only intensified the sell-off. While a weaker currency should benefit Chinese exporters, it will hurt consumers and manufacturers who import most of China’s raw materials and energy.
Of even greater concern to investors are the ongoing uncertainties about the property sector. Property and construction have been the largest contributors to economic growth in China, but fuelled by bingeing on cheap debt it seems to have reached bubble territory.
China’s property sector is estimated to account for an astonishing 30% of total economic output. Along with the effects from the Covid-19 lockdowns, a property crash now risks detrimental effects on GDP growth.
Recently, it has emerged that senior policymakers are concerned that the government is underestimating the combined economic impact of zero-Covid policies and the potential fallout from a collapse in the property sector on the wider economy, and are pushing for new growth stimulus measures and relaxing restrictions made on property developers to try to resuscitate the flagging market. Such debates are highlighting the difficulties facing the government as it attempts to shore up growth while pursuing a zero-Covid policy and taming heavily indebted property developers.
All these problems risk much wider ramifications for the global economy, especially commodity-exporting emerging markets such as South Africa. For this to happen at the same time as an overheating US economy and rising interest rates, the timing could not be worse.