Daily Management Review

China May Reopen In March, But Zero-Covid Has Rattled Supply Chain Confidence, Say Economists


While Chinese authorities may gradually ease restrictions in March, zero-Covid policies are beginning to erode global trust in the country's industrial supply chains, according to Li Daokui, Mansfield Freeman professor of economics at Tsinghua University in China.
According to Li, a former People's Bank of China advisor, supply chains will be largely unaffected in the short term because factories are still operating even if consumption is lower due to lockdowns.
“However, the long run impact might be already shaped, that is, the international economic community are thinking twice about the stability of supply chains in China,” he said.
“People used to think that China is the most solid, the most secure, most stable supply source. Now they are thinking to rebuild their own supply backup chains in their own countries or regions. So that is the situation now.”
Protests erupted across China over the weekend in a rare display of dissatisfaction with China's zero-Covid policy and prolonged lockdowns. There were also student demonstrations at Li's alma mater, Beijing's elite Tsinghua University.
Despite a central government policy change earlier this month that had raised hopes of a gradual easing, the unrest came as infections increased, prompting more local Covid controls.
Over the weekend, rare protests erupted across China as people expressed their displeasure with China's zero-Covid policy and prolonged lockdowns.
Nearly three years of controls have dragged down the economy, with many economists forecasting less than 3% GDP growth in China, well below previous years' ranges of 6% to 8%.
However, the number of infections began to fall earlier this week, and Beijing has pushed for more elderly vaccinations, which is critical to reopening. According to Li, opening up is at the top of Beijing's priority list.
“Well, I do believe the authorities are thinking about this ... and my estimate is that by late March, [at] the latest, the policy will have very good substantial change ... that is to concentrate on protecting the elderly, meanwhile, opening up for the rest of the population,” Li said.
While Beijing may consider importing and using Western mRNA vaccines, which have a higher efficacy rate, Li believes that other controls, such as ringfencing lockdowns, are more likely.
China's Covid-zero policy has reached the tipping point, and Beijing will need to change its strategy.
“People are complaining about things but the only thing on people’s mind is the zero-Covid policy. And people in all walks of lives are simmering with discontent about the continuation of this policy,” Li said.
“One major and philosophical reason is that the zero-Covid policy was designed to fight [the] virus, which was three years ago but now the virus has changed.
“In a war, [if] your enemy has changed, you have to change your tactics.”
“So, I am optimistic that the zero-Covid policy will see a major substantial, gradual, pragmatic change. Once this changes, much of the problems you mentioned, economic problem, problems with people’s emotions ... will gradually be mitigated or completely resolved.”
If China abandons its Covid-zero policies, Li believes the country can return to a "magic" growth rate of 5% to 6%, which he believes is the appropriate amount of growth given the current size of China's labor market.
However, simply opening up will not suffice because Beijing will also need to deal with its troubled property sector and assist indebted local governments in refinancing, according to Li.
However, as a first step, China can jumpstart its economy through infrastructure projects and investments.
“Well, in the short run, the very short run ... the number one most important driver of stabilization of the economy is still infrastructure investment,” Li said adding that there are many ready projects that are poised to launch that can offer the economy an instant boost.