• Sun. Nov 27th, 2022

Supply chains relax as Chinese zero-COVID policy lifted

Beijing (14/07 – 50.00) China’s zero-COVID-19 policy has had profound impacts on global supply chains due to the large-scale lockdown of major cities that would have been unimaginable before the pandemic. COVID-19-related restrictions have caused a severe decline in China’s manufacturing capacity, logistics and human mobility, as well as business and consumer confidence.

China is a major supplier of a variety of commodity goodsintermediate goods for manufacturing and consumer goods. The loss of its manufacturing and logistics capacity has contributed to an ongoing shortage of supply in interdependent global markets, intensifying worldwide inflation.

The wave of Omicron infections led to a 70-day-long lockdown of Shanghai, the country’s economic powerhouse, and caused unprecedented supply chain disruptions. Shanghai is not only an industrial hub but also lies at the centre of the Yangtze Delta Region. Most of the cities and towns in the region make up an interwoven supply chain network that funnels out overseas via Shanghai’s world-class seaports and airports.

Faced with intensified economic, political and social challenges, China has recently signalled a policy shift by modestly and incrementally easing its lockdowns. While this shift does not mean that China has completely abandoned the zero-COVID-19 policy, it does suggest that the policy will be gradually relaxed and implemented in a more balanced way.

There are multiple reasons to believe that China is adjusting its zero-COVID-19 policy.

The zero-COVID-19 policy has resulted in huge economic and social costs for China and its people. It has not only endangered China’s economic growth target rate of 5.5 per cent for 2022, but it has also increased the risk of social unrest associated with the implementation of strict control and monitoring measures. The policy is estimated to reduce China’s national GDP if it remains unchanged, so relaxing the rigidity of the restrictions is in China’s own interest.

China has also introduced two new policy terms into its COVID-19 lexicon — ‘dynamic zero-COVID-19’ and ‘zero-COVID-19 at community level’. In contrast with the strict zero-COVID-19 policy, these comparatively softer terms mean halting community transmission to an acceptable level and provide justification for easing the existing intensity of COVID-19 controls. This policy adjustment helps strike a balance between combating COVID-19 and pursuing economic resilience and growth, further demonstrating China’s policy shift.

Since April 2022 China’s approach to dealing with COVID-19 transmission in Beijing has not been as rigid as the restrictions put in place in Shanghai. Given that Beijing is the only city comparable to Shanghai in terms of economic weight, a plausible explanation for the policy adjustment is that the authorities have acquired a new attitude towards COVID-19 control and its economic impact.

The policy shift is reflected in new efforts by the central authority to manage the tendency of local governments to overreact to new case numbers under the zero-COVID-19 policy. Some local officials have reportedly been reprimanded for imposing disproportionately restrictive measures.

Unless there is an imminent risk of uncontrollable COVID-19 spread, China’s increasingly balanced attitude towards COVID-19 restrictions is likely to be sustained.

China’s policy shift can provide some respite from the global supply chain crisis. While the Shanghai lockdown was an extreme case of China’s zero-COVID-19 policy, COVID-19 controls in many other cities have been less rigid. The Pearl River Delta Region, China’s other major economic centre, has only been subjected to a partial lockdown. Here the zero-COVID-19 policy was implemented without inflicting a serious blow to global supply chains.

China has simultaneously rolled out policies that emphasise the need to protect the stability of supply chains. A ‘White List’ of entities has been created and is adjusted from time to time to ensure that the major players in supply chains can steadily restore manufacturing capacity.

As the zero-COVID-19 policy is being relaxed nationwide, one can be optimistic about China’s commitments and ability to gradually restore its manufacturing and logistics capacity necessary for maintaining local and global supplies.

But this is not an invitation for unbridled economic optimism. It should not be forgotten that China’s zero-COVID-19 policy is one of many causes of the ongoing disruptions to global supply chains. Other factors such as COVID-19-related export controls and trade-restrictive policies adopted by governments around the globe have also considerably impacted global supply chains.

The rise of protectionism, economic nationalism and unilateral sanctions, resulting from intensified issues such as US‒China competition and Russia’s invasion of Ukraine will continue to reshuffle the world trade order and cause mounting uncertainty and complexity in global supply chains.

On a more positive note, the continued effort by governments to engage in multilateral cooperation via the World Trade Organization and regional initiatives such as the Regional Comprehensive Economic Partnership does provide hope. This cooperation will enable states to take the collective action necessary to counteract the headwinds to global trade and maintain supply chain resilience.

While the impact of China’s zero-COVID policy on global supply chains should not be underestimated, it must be considered alongside broader threats to the global trading system.

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