How is China’s ‘zero-COVID’ policy impacting European businesses?

After seven weeks of severe lockdown, the Chinese commercial hub and city of 25 million people, Shanghai, finally announced Monday, that it would start easing its COVID measures on June 1, after struggling to contain one of its biggest outbreaks since the pandemic first began.

On Tuesday too, it said it had hit its much-awaited milestone of three successive days without any new cases of the deadly virus outside of quarantine zones, essentially meaning the country’s largest city had achieved its “zero-COVID” policy and restrictions can eventually start to be lifted.

It is this unbending “zero-COVID” policy – part of Chinese President Xi Jinping’s relentless drive to eradicate the virus from his country – that has wreaked havoc on the world’s second-largest economy, in many cases shutting down major cities, like Shanghai, to the point of standstill, just as the rest of the world starts to live with the disease, despite rising cases.

The implications for China’s economy are clear – reduced revenues and economic output – but how is Xi’s uncompromising “zero-COVID” policy impacting the EU and its own businesses?

Alicia Garcia-Herrero from Bruegel, a Brussels-based think-tank devoted to policy research on economic issues, says the effect is bad.

“The short-term impact of China’s lockdowns is negative for China and the world, both in terms of inflation and growth,” Garcia-Herrero told Euronews.

“By the end of May, expected GDP growth for China could well be below 4%. For the rest of the world, this means less demand from China and less imports. This is quite obvious in China’s import data for March and April.”

A ‘gloomy’ outlook

Many European companies are either based in China or have production units there, meaning any disruption to supply chains can have a serious effect on their businesses.

Bettina Schoen-Behanzin, vice-president of the European Chamber of Commerce in China, has described the current situation as “gloomy”.

Some of the European companies that her organisation represents in the Asian country have been allowed to start working again while still under lockdown, but Schoen-Behanzin told Euronews the situation is still challenging.

“Some businesses have started to resume operations. We have now two whitelists here in Shanghai where we have around close to 2,000 companies on those whitelists and we are entitled to resume operations,” she said.

“But it’s still very, very difficult because you don’t get the workers on site because they live in lockdown areas. And it’s very difficult for them to travel to the sites and they have to work in closed loops, which means once in the factories they cannot leave. So, they have to sleep and live there in the factories for weeks.

“And another big bottleneck is supply chains. It’s difficult to find truck drivers to receive raw materials to deliver your finished goods. And it has improved a bit during the last days, but still not back to normal. So, it is having quite a big impact,” the vice-president added.

Plummeting confidence

Beyond the difficulties to physically working, the confidence European businesses have in the Chinese economy is starting to fall.

According to a survey of companies in the European Chamber of Commerce in China, 60% of respondents said they have had to reduce their revenue forecasts for 2022 due to the impact of Beijing’s “zero-COVID” policy.

And that’s just in the short term. Long-term confidence is taking a serious hit too.

“About 80% [of European businesses] mentioned that because of its COVID measures, China is a less attractive investment destination and about 23% are thinking about shifting future investments to other markets. So, I think this is quite a huge impact,” Schoen-Behanzin explained about the survey taken.

“Businesses will for sure not leave China because it’s a huge market, 1.4 billion people. But for future investments, it definitely has an impact. They will think about shifting it to other markets.”

She added that European companies could start moving their Asia hubs elsewhere on the continent.

“The other impact is for Asia headquarters. If you have an Asia headquarters in a city where nobody can come and visit you, I mean, borders are closed here since two and a half years now, so nobody can come and visit, and you cannot travel to other countries in Asia. So, it doesn’t make sense to have an Asia hub here in Shanghai.

“So, I guess as we saw Asia hubs moving from Singapore like 10-15 years ago to China, now there is actually a move back to Singapore. That’s what we observe,” Schoen-Behanzin told Euronews.

China’s state planner, the National Development and Reform Commission of the People’s Republic of China, said on Tuesday that in order to allay the impact of China’s severe COVID measures, it will step up support for producers and manufacturers, as well as the service sector.

But this is not inspiring confidence with European businesses.

Garcia-Herrero told Euronews that over 90% of them are “concerned about supply chain disruptions”.

Time to start vaccinating millions

The European Chamber of Commerce in China says it is talking to different government authorities in Shanghai and Beijing on behalf of its members to give feedback on how they can be helped, and companies can get up and running again.

It is also advising them to change course when it comes to its “zero-COVID” policy.

Schoen-Behanzin said that rather than carrying out mass testing throughout Shanghai and other COVID hotspots, the Chinese government needs to accelerate its vaccination drive.

“What we are recommending is instead of testing millions of people, start vaccinating millions of people,” she told Euronews.

“They should actually start vaccinating people because the problem obviously is the elderly population, which is not really vaccinated. They should leave people who had tested positive and have mild symptoms at home instead of bringing them to those mass quarantine centres which really scare people and they should allow mRNA vaccines to be imported to China.

“So, we keep on talking to them because we feel they listen to us and we also feel that if we repeat it again and again, that hopefully it will change direction.”

The “zero-COVID” policy stands in stark contrast to the EU’s approach, and it is reflected in the recent economic output too.

Its strategy of containment worked well with previous COVID variants, but with omicron it appears to be faltering.

“It is not achievable since omicron is too contagious,” Garcia-Herrero said. “China can only delay the journey to herd immunity, but it will be very costly. It is hard to judge the reasons for trying to delay it. Maybe China is trying to prepare better to reduce deaths.

“In that case, vaccinations among the elderly need to increase further and possibly an increase in ICU beds. We need to see those things happen for China to exit [the pandemic]. Things could, of course, also change after the Party congress, but there is a long way to go.”

Many Shanghai residents say they dispute the authorities June 1 date given to ease COVID measures in the city, which if true, then European companies impacted by the lockdown could soon start business as usual.

The prospect of this, however, seems far off for now.