Shanghai’s COVID lockdown ‘impacts China’s economy in different ways’: analyst


Michael Hirson, Eurasia Group’s practice lead for China and Northeast Asia, explains how Shanghai’s strict COVID lockdown is impacting the country’s economy and how it is affecting the global supply chain .

Video transcript

RACHELLE AKUFFO: Welcome everyone. We examine the impact of China’s COVID policy as companies assess the impact on supply chains, inflation and global growth. To learn more, Dave and I are joined by Michael Hirson, Eurasia Group practice leader for China and Northeast Asia. Thank you very much for joining us. So Michael, as we now look at these extended lockdowns in Beijing, how costly would you say China’s zero-tolerance COVID policy has been for the Chinese economy?

MICHAEL HIRSON: It was very expensive. I think there are different estimates as to what that means for the first quarter. But in some ways, we don’t really see the full cost built-in in terms of data coming from China yet. Because the Shanghai lockdown is by far the costliest we’ve seen since the early stages of the pandemic. And it’s only been about three to four weeks.

Ultimately, this impacts the Chinese economy in different ways. It also impacts global supply chains. But we haven’t really seen the data fully – we haven’t seen the impact fully show up in the data yet.

DAVE BRIGGS: Michael, you said that Beijing’s zero COVID policies and Omicron were the number one risk for the Eurasia Group heading into the year. Why did you know that then? How unprepared is China for this moment?

MICHAEL HIRSON: I mean, say that without any joy. Obviously, it’s a very difficult situation in China. Our view at the time was that this was when Omicron – as we were preparing our key risks report, it was late December, early January. And that was right when Omicron was tearing the United States and Europe apart. And our perspective was given the higher transmissibility of underperforming vaccines from Omicron and China and this zero tolerance policy, it was just a collision course.

In other words, our fear was that Beijing would try to use the same tactic against Omicron as at the previous stage of the pandemic. And we didn’t think that was possible without a lot of economic and social disruption. And that’s where we are now. I think that will unfortunately be the case until China can really move away from zero COVID and have a bit higher tolerance for cases. Unfortunately, that probably won’t happen for at least another six months, possibly not until 2023.

RACHELLE AKUFFO: So until then, what kind of tools does the Chinese government have to really help the economy as it tries to fight these lockdowns?

MICHAEL HIRSON: Well, they are rolling out more stimulus. There will be more fiscal and financial support for businesses that are deeply affected. It is especially the service sector and small businesses in China that are trying to focus more on consumption. But to be honest, these are important. But they will only have a limited effect in terms of offsetting the impact. There’s not much you can do to support a restaurant that’s been closed or a part of the travel industry that’s been shut down.

The other thing they’re trying to do is prevent it from hampering global supply chains like it did in Shanghai. They are also… it’s difficult. As long as you maintain zero COVID, there will be difficulties in terms of logistics because drivers have to pass, workers have to report to factories. So I think they are trying to learn from what went wrong with the Shanghai lockdown, which was not handled well. So hopefully there will be a learning process there. But fundamentally, I think we’re still in for a pretty tough time ahead, given the fundamental challenge of what they’re trying to do.

DAVE BRIGGS: Michael, how much can we believe anything from China?

MICHAEL HIRSON: It’s a good question. I think in terms of COVID cases, I personally see no reason to be suspicious. I think the current incentives for the Chinese government, from the central to the local level, are to bring the epidemics under control before they get out of hand. So I think local authorities are under a lot of pressure to reveal cases. So I wouldn’t be too skeptical about it. The dead are another story.

China has a different way of counting COVID deaths. There may also be incentives for local officials not to reveal as much. So I think it’s a politically sensitive number. Then on the GDP side, in terms of the economy, there are some issues adjusting the official data to what is probably a better, more accurate measure of underlying growth. It has always been a problem. I don’t know if that’s necessarily grossly false. But I think it makes sense to think with – to take the official numbers with a grain of salt in terms of actual growth.

RACHELLE AKUFFO: And when you consider China as the second largest economy in the world, you also obviously have its key trading relationship with the United States. They are still trying to sort out this phase one trade deal. But we may be seeing a move toward lifting some of those tariffs as a way to somehow help fight inflation in the United States. How do you see the US-China relationship evolving in light of what we see here?

MICHAEL HIRSON: I think if you look at it from an economic point of view, there would be little argument that it would be beneficial for both parties to lift the tariffs. Treasury Secretary Yellen’s comments to Duleep Singh in the White House show that at least one wing of the Biden administration is making the case. I think politics is going to be pretty tough, though. Removing tariffs before the midterm elections risks making the administration appear weak vis-à-vis China.

China has failed to live up to its commitments to the phase one deal, which gives the impression that it may be being rewarded for something it did not follow through with. And then you have Ukraine where I think China is trying to find that delicate balance where they don’t directly support Russia’s invasion but still stand behind Russia as a friend and ally. And that also makes politics difficult. So I personally think it’s unlikely that we’ll see a major change in pricing policy this year.

DAVE BRIGGS: Michael, quickly, I never ask a one-word question. Is China more or less likely to try to invade Taiwan after what it saw with Russia in Ukraine?

MICHAEL HIRSON: Very difficult. I would say pretty much the same thing, to be honest. Maybe– I would say roughly the same thing, which isn’t very likely anytime soon. But the risks increase over time. I mean, we don’t think that’s a high probability for the next few years, unfortunately. You look at five years, 10 years, and those risks increase quite significantly.

DAVE BRIGGS: Major story that would be. Thank you, Michael Hirson from Eurasia Group. Thank you for coming. Thank you.

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