China has entered a period of deep economic distress. And the wound is largely self-inflicted. According to data released on 16 May by China’s National Bureau of Statistics (NBS), China’s consumption and manufacturing indices have tumbled in April. Industrial output in the world’s second-largest economy witnessed a 2.9 per cent contraction from a year ago, while retail sales crashed 11.1 per cent in the same period, considerably weaker than Bloomberg‘s projected 6.6 per cent drop.
In the struggling real estate sector that is battling increased regulatory pressure to go with the effects of China’s ‘dynamic zero-Covid’ policy, housing sales fell by more than 40 per cent year-on-year in April while revenue from land rights — a crucial source of earning for local governments — nosedived 38 per cent in the same period, marking the “largest decrease in over six and a half years,” reports Nikkei Asia. The April contraction in revenue follows a 23 per cent plunge in March.
China allowed a further cut in home loan interest rates and eased policies to encourage home buyers and spur demand in one of its most important sectors, but the move failed to lift the market or the spirit of buyers, battered by the world’s strictest Covid-induced lockdowns. Property sales in April plunged 46.6 per cent year-on-year in April — the biggest drop since August 2006 — and further consolidated the 26.17 per cent fall in March, reports Reuters.
In a measure of the economic toll of the lockdown measures in China that by the end of April spanned at least 27 cities across the country and impacted up to 180 million people (CNN‘s estimates), the automotive sector plunged 43.5 per cent as key production centres were ravaged in and around Shanghai and in northeastern Jilin province, and Wall Street Journal reports that in Shanghai “not a single car was sold” in April.
In this photo released by China’s Xinhua News Agency, workers clean and disinfect the floor of a makeshift hospital at the National Exhibition and Convention Center in Shanghai, 14 April, 2022. AP
There has been a concomitant drop in steel and cement production as well and these have dragged down total manufacturing output by 4.6 per cent.
Indications are that the collapse in China’s economic activity due to Xi Jinping’s ‘dynamic zero-Covid policy may lead to a persistent slowdown to the extent that it may not be possible for the Chinese economy to ‘snap back’ as soon as the stringent curbs are withdrawn, as it happened post-2020. Part of the reason is that the Covid lockdown measures this time, unlike in Wuhan, are being implemented at the lower administrative level where officials tend to be stricter to take no chances, and the result is ad-hocism and uncertainty.
This has given rise to concerns that China’s stated annual growth target of 5.5 per cent may have to be revised downwards by a few percentage points. The doubling down on the Zero-Covid strategy has forced analysts from Standard Chartered, Bloomberg, Citigroup and Goldman Sachs to downgrade China’s annual GDP forecast to around 4 per cent, that too on assumptions of “significant government support”.
Exports, the one bright spot amid the gloom, has also witnessed a sharp slowdown due to weak global demands, especially in the US and EU where consumers are grappling with high inflation. The severity of Covid controls along with curbs on overseas travel are forcing European businesses and individuals to “seriously rethink their China presence”. A controversial ‘de facto’ ban on international travel has further dampened sentiments and a US lobby warned on Tuesday that these measures may cause a decline in foreign investment going ahead.
Yet, worrisome as these indicators are, by far the biggest worry for Xi Jinping would be the unemployment figures that are on an upward trajectory, revealing the damage his Covid policies have dealt to the job market — the one area where large-scale disruption may lead to social instability. According to NBS figures as reported by Asia Times in April, unemployment rate in urban areas rose to 5.8 per cent in March, and 16 per cent of people aged between 16 and 24 in urban areas were jobless.
That figure of surveyed unemployment rate crept up to 6.1 per cent in April, the highest since February 2020 and above the government’s 2022 target of below 5.5 per cent while the joblessness figure for the 16-24 group touched a record high of 18.2 per cent in April. With 10.76 million fresh graduates poised to enter the job market this year, this could mean further trouble.
For an authoritarian regime that draws its legitimacy primarily from technocratic proficiency and ability to ensure economic growth and prosperity, cratering of the economy is bad enough, a depression in the job market is worse as it may create social unrest and pose political challenges for a regime obsessed with social stability. And it should be of particular concern for Xi ahead of the 20th Congress of the Chinese Communist Party where he is expected to secure an unprecedented third term in power.
Once again, unlike the 2020 experience when the lockdown measures in Wuhan benefitted the e-commerce industry, Xi’s ‘zero-Covid’ policy to tackle the notoriously contagious Omicron mutant has resulted in a decimation of both online and offline businesses in a “double killer” effect.
The situation is so grim that a former Chinese central bank advisor, Huang Yiping, an economics professor at Peking University, was quoted by Wall Street Journal as saying, “We’ve reached a point where we should use policies to save the economy at all costs.” A similar refrain can be heard from Wei Yao, chief economist at Societe Generale SA, who told Bloomberg that “if the surge in unemployment does not raise the urgency of adjusting the zero-Covid measures to allow the economy to normalize, we don’t know what will.”
The founder and chair of one of Asia’s biggest private equity investors, Weijian Shan, has said that China’s policies have caused a “deep economic crisis” and “Chinese economy at this moment is in the worst shape in the past 30 years”.
Crucially, it’s not just technocrats and academics who are pointing at the dangers of continuing with the ‘zero-Covid’ policy. Chinese premier Li Keqiang, a trained economist known more for his administrative acumen than doctrinaire approach, has warned that the employment situation is “complicated and grim” and has asked local authorities to prioritise the stability of job market to “ensure the achievement of the annual employment goal and welcome the victory” of the Communist Party’s national congress. He has also advocated cuts in fees and taxes to help small and medium businesses, reports South China Morning Post.
It is evident that at least on the economic policy, there is a debate, if not dissent within the upper echelons of the Chinese Communist Party (CCP). The debate seems to be centred on whether ‘Zero-Covid’ policy should be reconciled with economic growth and the severity proportionately eased.
So, faced with an economic collapse, vociferous public anger, frustration and an internal pushback on the strict ‘zero-Covid’ policy, a crisis that may lead to collateral damage and open up channels of internal dissent just ahead of CCP’s most consequential quinquennial meeting, what does Xi do?
The Chinese president has responded by doubling down on ‘zero-Covid’ policy that continues the brutal curbs on everyday living and travel to stamp out the virus, staked his entire political career on the policy and has called on party members and workers to launch an “unwavering struggle” against “doubters” and “critics” of the policy.
At a 5 May meeting of the seven-member Politburo Standing Committee, CCP’s highest decision-making body, Xi claimed that China’s “prevention and control measures are scientific and effective,” reiterated that there won’t be any change in the ‘dynamic zero-Covid policy’ and no letup will be tolerated in taking steps to end the threat of the virus. He gave no indication that economic recovery will be squared with Covid prevention, revealing perhaps his conviction that true economic revival is contingent on achieving a ‘zero-Covid’ status.
The readout of the meeting indicates that there is considerable dissatisfaction within the party on ‘zero-Covid’ policy. It also shows that Xi remains as skillful as ever in harnessing policy agenda to achieve his political goals, in this case, using the strict Covid policy as a loyalty test of sorts to win the battle within the party.
The centralization of hard power in Xi’s hands means that dissent within the party must reach a tipping point before it can pose even a remote political challenge to Xi. On the other hands, ambitious workers and local government functionaries know that fidelity to Xi’s policy prescriptions is the only way to climb up the power ladder. A combination of these factors presents Xi with unique leverage within the party. And in politburo meeting, he pressed hard.
“We should have a profound, complete and comprehensive understanding of the epidemic prevention and control policies set by the Party Central Committee, resolutely overcome the problems of inadequate understanding, inadequate preparation and inadequate work, resolutely overcome the ideas of contempt, indifference and self-righteousness, always keep a clear head, unswervingly adhere to the general policy of dynamic zero-Covid, and resolutely oppose all distortions, doubts and denials. We will resolutely struggle against all words and deeds that distort, doubt and deny our epidemic prevention policies,” reads an excerpt in Chinese, as translated by Bill Bishop of Sinocism.
In the official English translation released by Xinhua, “it was stressed at the meeting that Party committees and governments at all levels, and all sectors must align their thinking and action with the decisions and plans of the CPC Central Committee to ensure they remain on the same page as the CPC Central Committee ideologically, politically, and practically.”
From the calling out of “doubters” and repeated stress on the need for everyone to align themselves completely with the decisions taken by the CCP Central Committee, it is possible that the resistance lies at the senior functionary level. To overcome this challenge, Xi took recourse to martial expressions and revival of revolutionary rhetoric from the Mao era.
To frame the fight against Covid as a “battle” which was won at Wuhan and will be won again at Shanghai is a tactic by Xi to present himself as the supreme leader who alone is skillful, capable and wise enough to pull China out of the Covid morass. However, every win demands sacrifice, and in this case the sacrifice is the suffering that people must endure along with “persistence” that will bring victory.
The phrase “persistence is victory” made its appearance during the 5 May meeting which harks back to CCP’s revolutionary past. David Bandurski points out in China Media Project that the earliest instance of the phrase was in the decade from 1927 to 1937 when CCP was fighting the Kuomintang forces in Chinese Civil War. As the severity of Xi’s ‘zero-Covid policy’ has intensified, the frequency of the phrase in Chinese official media has increased.
Bandurski writes that “the phrase featured in seven articles in the People’s Daily in April, as the situation in Shanghai grew increasingly desperate. The most prominent was a page-one appearance on April 15, even as news of elderly deaths and violent quarantine clashes dominated media outside China.”
Xi perhaps feels that revolutionary rhetoric is the only way to contain serious discontent within the society over a deeply unpopular policy. By invoking words such as “struggle”, “persistence” — words that are loaded with significance in CCP’s history — Xi is seeking mass indoctrination that will unify the people around the party despite hardships, or even because of it.
China’s health chief Ma Xiaowei has said already that China will “throw more resources at ‘zero-Covid’ policy and has claimed that Shanghai has stabilised and even improving due to the strategy though health authorities have warned of a “rebound” and tensions and cases are rising in Beijing.
The central question, therefore, remains unanswered. Why would Xi seek to double down on a policy that clearly has limited ability to curb the transmission of Omicron — a mutation that the world has learnt to live with — and has resulted so far in massive economic damage, immense public anger and increased dissenting views within the party?
There are several reasons behind Xi’s decision to do so. First, despite Xi’s claim that the zero-tolerance strategy toward Covid is scientific, it is evident that China’s approach from the very beginning has been more political than scientific. Led by Xi, the CCP has sought to prove a point to Chinese citizens and to the world at large that its handling of the Covid pandemic has been far superior compared to the disorder and inefficiency of the western world that has suffered far more deaths. The CCP has been very consistent in its messaging that its “good governance” is down to its political system that is far better than chaotic democracies.
Two years of relentless propaganda has constricted Xi’s space for manoeuvring to such an extent that a reversal now carries an intolerable risk of rising in a contagion that will puncture the halo around Xi and every death henceforth will be blamed on him. Moreover, while the Chinese public might be suffering from Covid-related restrictions, the political challenge arising from this scenario is insignificant compared to the loss of public trust that may happen if the policy — that has been at the core of CCP’s propaganda — is overhauled so close to the crucial party conclave. It will be an admission of Xi’s personal failure after two years of claiming that ‘zero-Covid is the best’, and the coveted third term may become elusive.
This may explain why the CCP general secretary was forcefully claiming during the recent politburo standing committee meeting that “our policies can stand the test of time, and our measures are science-based and effective.”
As analyst Yun Sun of Washington-based Stimson Center told CS Monitor, “In China’s political culture, the reorientation of policy … raises a lot of questions. The first question is, was that policy wrong?… With his (Xi’s) policy currently, he’s already creating a lot of complaints and … dissatisfaction within the country, so for him to change the policy now is going to be politically even more risky than not changing it.”
Second, a policy hinged on minimizing deaths by totally shielding the public from exposure to the virus than focusing on inoculating the vulnerable sections has given rise to a situation that up until March, only about 50 per cent of people aged 80 and over has been vaccinated.
A recent peer-reviewed study published in Nature has got wide publicity in Chinese state-controlled media. It posits that “China risks a ‘tsunami’ of coronavirus infections resulting in 1.55 million deaths if the government abandons its long-held Covid Zero policy and allows the highly infectious Omicron variant to spread unchecked”. The study says Chinese healthcare system may also crack under pressure as the spread of “Omicron could lead to 5.08 million hospital admissions and 2.67 million people in ICUs” with the crest occurring between May and July, according to Global Times.
This scenario, while credible, masks a far more important policy failure. The Xi regime had two years to vaccinate the elderly citizens, but in its obsession with a ‘zero-Covid’ strategy focused on enforcing lockdown measures, it failed to immunize the most susceptible section of its populace and incentivize vaccination.
Alongside, as Joerg Wuttke, President of the EU Chamber of Commerce in China points out, Chinese public are “genuinely” scared of the virus because the “authorities do not inform that the Omicron variant is milder, they do not inform that other countries have learned to live with the virus. The authorities have spent a year bad-mouthing Western mRNA vaccines, with the result that people in China don’t trust the vaccination.”
Xi does not have the leeway to change tack and has ended up painting himself into a tight corner from where pressing ahead with collaterally damaging ‘zero-Covid’ remains the only option.
Third, the zero-tolerance policy is also meant to be a loyalty test at a time when Xi’s strategy is facing internal resistance. Lingling Wei writes in Wall Street Journal that premier Li, who has taken a more pragmatic approach compared to Xi’s ideological crusade against the virus, has become more ubiquitous of late in Chinese state media where articles and reports are subject to careful party scrutiny. Under Li’s influence, says the WSJ report, some stringent regulatory measures are being dialled back and the 66-year-old is “also trying to influence the selection of his replacement when he steps down as premier in less than a year” to ensure a replacement “who would be a counterweight to Xi.”
Former Australian prime minister Kevin Rudd has added to speculation that while Xi may secure a third term “but maybe he will not get up around him all the folks that he wants.”
The notoriously opaque Chinese political system renders most analysis speculative, but going by Xi’s recent speech where ‘ideological, political, and practical’ buy-in on Xi’s policies was made an absolute prerequisite for party and government officials, it is possible that the ‘zero-Covid’ policy is being used by Xi as a tool to test political loyalty and the forceful implementation of lockdown policy will be a metric for allegiance.
It is also a possibility that having surrounded himself with a coterie who dare not challenge the ideas of the supreme leader, Xi is caught in an “authoritarian feedback loop” and his paranoid style of politics leaves no place for any meaningful policy debate, resulting in even more rigidity in decision-making.
Whatever be the real reason behind Xi’s brutal lockdown policy that makes no commercial, scientific or social sense, it is here to stay at least until the Party Congress and any easing will be meandering and incremental.
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