China’s ‘Zero-Covid’ Crackdown Threatens Global Economy

When Group of 20 officials meet this week, those representing Chinese President Xi Jinping have some serious explaining to do about a “zero-Covid” policy threatening the global economy.

Wednesday’s confab in Washington takes place on the sidelines of the spring sessions of the International Monetary Fund and the World Bank. It comes as the latter institution cuts its prediction for global growth in 2022 to 3.2% from 4.1%. Most of the downshift reflects fallout from the war in Ukraine. But some of it will bear Beijing’s fingerprints, too.

For weeks now, economists everywhere worried that sticking with China’s Covid absolutism was a headwind the global system scarcely needs. A zero-case strategy that worked wonders in 2020 is no match for Omicron and more transmissible variants to come. Worse, it’s backfiring on Asia’s biggest economy, on which the region is relying to drive recovery efforts.

Fresh lockdowns in Shenzhen, Shanghai and elsewhere are reaching a critical mass. They mean that roughly 400 million people across 45 mainland cities are under full or partial lockdown, notes economist Lu Ting at Nomura Holdings. Lu says we’re talking about roughly 40% of Chinese gross domestic product, or about $7.2 trillion.

“Global markets may still underestimate the impact, because much attention remains focused on the Russian-Ukraine conflict and U.S. Federal Reserve rate hikes,” Lu says.

New data are a reality check for G-20 officials who have a rare chance this week to put China on the spot, if they dare. On the surface, China had a solid first quarter, with a 4.8% jump in GDP after a 4% rise in the October-December quarter. But a 3.5% drop in retail sales in March from a year ago is precisely the lockdown-related downshift economists feared.

The same with the modest 5% growth rate for factory output, a marked slowdown from January and February. Imports, too, disappointed in March, highlighting the global feedback effects from China’s government stubbornly sticking with the “zero-Covid” plan.

If G-20 officials did their jobs, they’d be expressing their concerns to their Chinese counterparts.

This goes, too, for calling U.S. officials to account. Surely, there are valid reasons to question why Fed Chairman Jerome Powell’s team is so laid back about U.S. inflation surging to 40-year highs. Or why democracies like India think there’s no reputational risk to sending Vladimir Putin’s Russia billion-dollar checks for oil and gas. Or whether Moscow deserves to stay in the G-20.

Yet China’s inward focus is a growing headwind. For Xi, the next several months are all about his norm-smashing power grab. This is the year he secures an unprecedented third term as Chinese Communist Party leader. Xi’s linear focus on that prize above all else could be a bigger problem than Asian neighbors may realize.

Blame it on pride, reckons economist Nancy Qian at Northwestern University. Xi’s nation of 1.4 billion people reveled in China’s 2020 success in taming the pandemic, a performance that helped the economy lead the globe back to growth in 2021. Yet, Qian argues, that win made Xi’s inner circle reluctant to pivot to other strategies in the Omicron phase of the pandemic.

The answer, Qian argues, is for Xi’s inner circle to “change their public messaging to manage expectations.” That includes preparing the masses for living with the virus—and accepting more infections, deaths and vaccination boosters. Adopting a more flexible strategy could help boost domestic confidence and retail sales in China’s $13 trillion economy, increasing its role as a growth engine.

In March, for example, China’s exports increased 15.7% year-on-year, while imports were effectively flat. The disconnect means that demand inside China was disappointing even as the lockdowns spooking world markets—and worrying G-20 nations—were just beginning.

There are steps China could take to get as close to this year’s 5.5% growth target as possible. The People Bank of China could slash its 2.85% one-year policy loan rate or announce bigger cuts in reserve requirement ratios. Beijing could enact tax cuts, as Premier Li Keqiang suggested. Xi’s team could incentivize municipal governments to stimulate growth via bond sales.

Of course, any of these steps might undo Beijing’s efforts in recent years to reduce leverage in the economy, particularly among giant property developers. Arguably, nothing would revive things faster and more broadly than dropping the Covid absolutism undermining household and business demand.

Will Xi have the foresight to do that? Or the confidence to change gears in ways he’s avoided for several months now? These are among the questions G-20 officials should be posing to China’s representatives in Washington this week.