China’s zero-Covid policy tests Xi’s iron grip and threatens the global economy

Beijing’s use of lockdowns to tackle coronavirus risks fuelling inflation around the world, writes Tom Rees

Basic food supplies and patience are running low in Xi’an after two weeks of lockdown.

Xi has not left China in two years as his regime seems to prioritise domestic issues, but rumblings in Beijing and a sharply slowing economy could test his resolve.Credit:AP

Confined to their homes since December 23, residents in the Chinese city famous for its Terracotta Army have been reduced to bartering for food with cigarettes and electronics as they complain on social media over the lack of essential supplies.

For Chinese president Xi Jinping, who is expected to claim another five years in an unprecedented bid for a third term later this year, it is a faltering start to a crucial 2022.

Omicron and China’s inadequate vaccine against the fast-spreading variant risks pushing the country’s zero-COVID strategy to breaking point, as it runs out of time to stamp out cases ahead of athletes arriving for the Winter Olympics next month.

Xi has not left China in two years as his regime seems to prioritise domestic issues, but rumblings in Beijing and a sharply slowing economy could test his iron grip.

“The COVID strategy has on balance become problematic for growth,” says Louis Kuijs at Oxford Economics.

“Every new set of restrictions after a relatively mild outbreak reduces economic activity directly and, indirectly, weighs on people’s confidence and willingness to spend.”

According to Kuijs, China’s zero-COVID strategy and its property market slowdown on the back of now defaulted giant developer Evergrande are the “biggest hurdles for growth”. He expects growth to slow from 8 per cent in 2021, to 5 per cent in 2022 after a “particularly weak” start to the year.

Despite concerns over the economic impact, China seems determined to stick by its lockdown strategy even as other “zero COVID” countries such as New Zealand throw in the towel and some, including Britain, “learn to live” with the new variant. Studies found China’s Sinovac vaccine is much less effective against Omicron than rival jabs, though there are hopes the shot will still hold up against severe illness.

The zero-COVID strategy initially helped China escape major economic damage by stemming infection rates enough to reopen, making it the only major economy to grow in 2020. But the ultra-transmissible Omicron ramps up the risk of stop-start restrictions and global spillover effects if ports and factories shut again.

“The economic impact of these lockdowns do have some impact but at the moment, these are manageable. If the infections were to reach US levels, then that truly would be an economic and human catastrophe not just for China but the rest of the world,” says Prof Kerry Brown, director of King’s College London’s Lau China Institute.

But even if pressure from a stalling economy mounts, experts believe there is little chance of a shift in strategy, particularly before Xi’s presidential future is sealed.

“I don’t think the zero-COVID strategy is likely to change before the party congress at the end of this year, which I think actually means in practice probably spring of 2023,” says Professor Rana Mitter, director of the University of Oxford’s China Centre.

Mitter argues there have been recent hints by state-run media that could suggest “there is unhappiness about the current balance of factions in the top leadership”. He says there is “almost no doubt” Xi will be handed another term but adds there are “big flashing warning lights” for Beijing to deal with, including the Evergrande crisis, climate change and deteriorating job prospects for university graduates.

China’s economy continues to stutter.Credit:AP

The zero-COVID strategy initially helped China escape major economic damage by stemming infection rates enough to reopen, making it the only major economy to grow in 2020. But the ultra-transmissible Omicron ramps up the risk of stop-start restrictions and global spillover effects if ports and factories shut again.

Beijing has already moved to shore up its economy with the central bank cutting its key lending rate and banks’ required buffers of money. Officials have vowed to unveil more support as the economy stuttered even before the growing threat of Omicron.

Economists warn this could stoke global inflation. Supply bottlenecks boosting prices have been worsened by COVID outbreaks causing factory shutdowns and congestion at ports from Los Angeles to China. Recent cases have stoked fears of a repeat.

“If that’s shutting down ports, or important factories for the global supply chain, there is clearly a risk there’s further supply shocks and shocks to global inflation,” says Jonathan Ashworth at Fathom Consulting.

As China’s zero-COVID strategy threatens to spark tension over Xi’s grip and slam the brakes on 2022 growth, the wider global economy will also suffer.

Telegraph, London

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