The paranoia of the zero-clearing policy has hit China's economy hard

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Li Yong China Labor Forum

Since the beginning of the year, the Omicron strain of the new coronavirus has spread widely in China. Due to the high infectivity of the virus and the poor protection of domestic vaccines vaccinated by the Chinese people, the epidemic is more difficult to control than before. Xi Jinping's almost paranoid insistence on continuing to implement the tough zero-clearing policy is not only unhelpful in dealing with the current epidemic, but has also caused a horrific humanitarian disaster in Shanghai. At the economic level, the outbreak caused by this wave of Omicron virus strains has hit coastal economic centers, including Shenzhen and Guangzhou in addition to Shanghai. These key economies have fallen into a state of complete or partial closure. According to an estimate by Japan's Nomura Bank, 400 million people in China are currently under various levels of lockdown and control, and they contributed an average of about US$7.2 trillion in economic output each year in the past.

growth target

The Chinese government has set a GDP growth target of 5.5% for 2022, and according to official Chinese figures, growth in the first quarter from January to March of this year was 4.8%, although this figure itself is not very credible. Generally speaking, first-quarter numbers are usually slightly lower as the year's construction and investment projects have just started. However, since the lockdown of Shanghai, the economic center, only started at the end of March, the impact on the economy will only start to be reflected in the second quarter.

So how much impact will the CCP’s strict city closure policy have on a city’s economy? This figure can refer to Jilin Province, which has also entered a state of closure. Jilin began to implement the closure about half a month earlier than Shanghai, and the impact on the economy was partly on top of the GDP growth in the first quarter. Jilin's GDP in the first quarter showed an astonishing negative growth of -7.9%! Although the economy of the three northeastern provinces has already fallen into a state of half-dead, compared with the growth of 5.4% in Heilongjiang and 2.7% in Liaoning, Jilin's economic recession can be described as a cliff-like decline.

Therefore, it can be expected that Shanghai's economic figures in the second quarter will shrink significantly, and there may be zero or even negative growth. As the economic center of Shanghai, its negative effects will radiate to the whole country, and the industrial city in the Yangtze River Delta will bear the brunt of the paralysis. . Therefore, in the second quarter, which is supposed to drive the country's full-year economic growth, there is a high chance that China's numbers will drop sharply, and it is very unlikely that the full-year economic growth will reach the 5.5% target. That's bad news for an economy that has been falling. The International Monetary Fund in mid-April also downgraded China's economic growth forecast for this year to 4.4% from 4.8%, but also warned that further cuts could be made. Therefore, Premier Li Keqiang said in mid-April that he should realize that each wave of the epidemic will bring higher and higher economic costs, and asked local governments to balance epidemic prevention and economic stimulus measures. But how to "balance"? No one in the CCP seems to be able to make it clear.

While other parts of the world have basically adopted the coexistence of the virus, China, the world's second largest economy, still adheres to the zero-zero policy. The large-scale shutdown has greatly affected the operation of production and supply chains, making foreign capital deeply worried. . Especially this coincides with the enormous economic upheaval brought on by the war in Ukraine. So even if the decoupling process started before Covid-19, Xi's zero-dealing policy is accelerating it, and foreign companies will speed up moving production out of China. According to a survey by the American Chamber of Commerce in China (AmCham China), 58% of the surveyed US-funded companies in China lowered their revenue forecasts for this year, and 52% of the companies said that their investment plans in China have been delayed or have planned to reduce investment. The Chamber of Commerce also stated that if China continues its zero policy, more multinational companies will consider moving to other countries.

capital outflow

Coupled with China's attitude towards Russia's invasion of Ukraine, foreign investors are more concerned about geopolitical risks, Western blocs are more cohesive, at least in the short term, and China faces increasing economic and diplomatic pressure, including a future encounter with today's Russia-style The threat of sanctions, as well as economic decoupling and increased protectionism. Another added risk is the widening interest rate gap between China and the U.S., with the Federal Reserve raising U.S. rates and pushing the dollar higher against the yuan. Foreign capital has accelerated its withdrawal from China. According to the latest figures released by the People's Bank of China, foreign currency deposits recorded a negative growth in April, falling by US$48.8 billion. Part of this outflow is due to rising U.S. interest rates, but it also reflects widespread pessimism over the threat of a recession and a wave of corporate defaults in China.

The withdrawal of foreign capital has directly led to a sharp drop in the stock market. Since April, the Chinese stock market has fallen by nearly 5%. The mid-to-large stock index has fallen 20 percent since the beginning of the year, making China the world's worst-performing stock market after Russia.

Domestic enterprise crisis

Of course, these negative factors are not just aimed at foreign capital. Domestic companies are also facing crises such as shutdowns, layoffs, weak consumption, and debt defaults. Since the outbreak mainly occurred in major industrial areas, the shutdown of production lines in the sealed areas affected the downstream supply chain, and other areas not affected by the epidemic also faced the dilemma of insufficient raw materials or parts to produce. The CEO of Huawei's consumer business further stated that after May, all technology and industrial industries involving Shanghai's supply chain will be completely shut down. For the manufacturing enterprises that have stopped production, the suspension of production will directly cause the products to fail to be delivered as scheduled, so it can be expected that there will be a large number of breach of contract lawsuits, especially the breach of contract against foreign-funded enterprises, which will cause domestic capital the most headache.

Interestingly, there is news on the Internet that some central enterprises are unable to produce due to the closure and control policy, resulting in overseas contract orders unable to fulfill the contract delivery as scheduled. On the foreign side, however, the central SOEs insisted on paying compensation for breaches of contract, citing a report by China Daily, China's main foreign official media, that the local area was not affected by the epidemic and that factories had fully resumed work. In desperation, the leaders of the central enterprises said that China's state media cannot be trusted and should not be confirmed, and the real situation depends on the reports of the BBC or CNN.

This reflects that both the actual closure and control policies and even propaganda and fraud have caused considerable impact and difficulties on enterprises. Even state-owned enterprises are facing a crisis. For private SMEs with lower risk-resistance capabilities, the situation makes them even more difficult. feel despair. For many small and medium-sized enterprises in lockdown areas (especially Shanghai), the suspension of operations for more than a month has directly "zeroed out" their income. On April 30, Hong Kong's "Economic Times" reported that 40% of the operators of small and medium-sized enterprises surveyed said that their cash flow was not enough to support another month. This means that by June, these SMEs are likely to face bankruptcy. Small and medium-sized enterprises support 62% of China's GDP, and 90% of them belong to the manufacturing industry. If a large number of small and medium-sized enterprises fail, it will not only severely damage the transcripts of Chinese capitalism in numbers, but also affect upstream and downstream supply chain companies, triggering a ripple effect of the economic crisis. In April, China's manufacturing and service sector PMI numbers were at the bottom of the G20, even worse than Russia, which was mired in war and sanctioned by Western capitalist powers. PMI is an index that shows market conditions and companies' expectations for growth or contraction.

"The hardest employment season in history"

In the first quarter of this year, the loss rate of industrial enterprises above designated size was as high as 22%, and some cities such as Shenzhen even reached 40%. Manufacturing enterprises in these areas are already on the verge of collapse. The difficulties faced by these enterprises have triggered an employment crisis, and the Chinese government's zero-epidemic prevention policy has hit the urban service industry, but the service industry is the largest source of employment in China's cities and towns. The urban unemployment rate in the first quarter has reached 5.8%, breaking the 5.5% ceiling proposed in the "14th Five-Year Plan" and hitting a new high since June 2020. The most striking is the situation of the youth group, the unemployment rate of the 16-24 year old group is as high as 18%. At the beginning of May, the employment rate of college graduates nationwide was only about 20%, which was called "the most difficult employment season in history". Moreover, the statistical design of the so-called "urban unemployment rate" has a lot of water in itself. Migrant workers do not have urban household registration. After unemployment, they do not have the protection enjoyed by any urban household registration residents. Living in rural areas, such migrant workers will naturally not be counted. As the absolute main force of China's labor force, the unemployment of migrant workers is much more serious than that of urban residents.

At the same time, Chinese Internet companies, which were quite prosperous a few years ago, have also reported mass layoffs. Many Internet companies have laid off staff by as much as 20%. A large number of unemployed workers who have been laid off and beleaguered have been forced to switch to odd jobs such as food delivery riders and online car-hailing drivers to make ends meet. At present, 200 million of the country's 880 million labor force belong to this so-called "flexible employment". Therefore, on May 7, at the meeting, Li Keqiang rarely bluntly stated that the current national employment situation is "severe", and at the same time proposed to promote the healthy development of the platform economy (Internet industry) and encourage entrepreneurship and innovation to drive employment. This position seems to be very different from Xi Jinping's earlier strict rectification of the Internet industry, which highlights the differences between the two on economic policy and even the direction of epidemic prevention. This is part of an ongoing power struggle in the CCP.

The real estate market, which used to be the decisive driver of economic growth, has also been in deep trouble after the financial bubble burst by the debt problem. Home sales by the top 100 real estate companies in March fell 53 percent from the previous year, according to China Real Estate Information. The growth rate of national real estate development investment also dropped from 25.6% in the same period last year to only 0.7% in the first three months of this year. According to this trend, China's real estate development investment is about to record negative growth and fall into a state of shrinking. In fact, the national housing sales area and sales have both experienced serious negative growth, falling by 13.8% and 22.7% respectively. These figures, from China's official National Bureau of Statistics, unmistakably show that the real estate market is in the midst of a devastating crisis.

In response to this series of crises, what kind of corresponding measures will the Chinese government possibly take? First of all, from a comprehensive perspective, in the past, the three locomotives that drove the economy—consumption, exports, and investment—have all experienced problems. The total retail sales of consumer goods fell by 3.5% year-on-year in March, and auto sales in April halved. Foreign trade orders could not be fulfilled, imports and exports were interrupted, and foreign trade orders fell by half in March. China's General Administration of Customs announced that the total value of imports in March fell 0.1% year-on-year, the first decline since September 2020, while outside expectations should have risen 8%. Shanghai Customs practitioners roughly estimate that since the closure and control, the daily book losses have reached 10 billion yuan.

Disastrous financial data for April

The People's Bank of China released financial data for April that looked dismal, even with Beijing's best efforts, and some numbers were even worse than in February 2020, when the first wave of the epidemic broke out. The report shows that the increase in social financing in April was 910.2 billion yuan, down 51% year-on-year. The increase in RMB loans was 645.4 billion yuan, down 56% year-on-year. The total amount of housing loans has shrunk by 60.5 billion.

Some people think that the People's Bank of China uncharacteristically did not publish financial data on the 12th of each month as usual, but chose to publish it on the evening of Friday the 13th. It is precisely because the People's Bank of China knows that the data reflects the situation is very bad, and once the communiqué is likely to be triggered. The panic and slump in the investment market, especially the stock market.

Therefore, it can be seen that the contraction of the total amount of housing loans means that the Chinese people's desire to buy houses has been "cleared". Even if the Chinese government wants to relax loans, the People's Bank of China also decided to reduce the deposit reserve ratio by 0.25% on April 25. Willing to increase leveraged debt consumption. The Chinese government is also trying to re-heat the real estate market. At the individual level, hundreds of cities across the country have begun to loosen the housing purchase restriction policy one after another. For real estate companies, the so-called three red lines policy of the central government has also existed in name only since the end of 2021. But judging from the figures from the People's Bank of China, none of these indirect stimulus policies have had any effect.

"Run Learning"

Therefore, it is widely expected that China will once again increase investment in infrastructure in 2022, driving economic growth and solving demand and employment problems through this state-capitalist policy. However, after years of super-large infrastructure investment, infrastructure in many parts of China has already been saturated. The economic effect of investing in infrastructure again has become very low, and will further exacerbate the already serious local debt problem.

Such a bleak economic environment, coupled with the fact that the general public has been tossed by the epidemic prevention and control and the economic crisis is almost exhausted, and the loss of confidence in the future has become a general consensus and a social atmosphere has been formed. A video that has been widely circulated on the Internet recently expresses this mentality. The video shows the police in white protective clothing coming to the door to pull the head of the household into compulsory isolation, and threatening the head of the household that he will face punishment and harm if he does not obey. After three generations, the head of the household responded decisively, "We are the last generation!" Therefore, the hottest topic of discussion on the Chinese Internet recently is "Run Xue". The so-called "Run" is transliterated from the English "Run", which refers to the discussion on how to escape China. This is a more intense and direct hot topic after the "involution" and "lying flat" thoughts.

Some are now pinning their hopes on the economy getting back on track once this wave of infections is contained or subsided. However, the properties of the Omicron strain make it nearly impossible to eradicate, and like the flu, it only spreads in waves. If each transmission resulted in a month-long lockdown in a Chinese city, there would almost certainly not be a day in the year when China was in a "normal" state, and economic activity would never "get back on track." So, in order to save the economy while saving face, the government may pretend to be zero and the people pretend to believe, but in fact coexist with the virus. However, there is no doubt that, for the purpose of ensuring Xi Jinping's lifelong governance, all major policy changes must be left after the 20th National Congress of the Communist Party of China in the second half of the year. But the actual situation is: how many enterprises and how many grassroots workers can survive the second half of the year - even in the second half of the year, it may not be possible to usher in changes?

Crisis

Thus, it can be seen that China's economic situation is the closest to the brink of a cliff (if not already falling) since the restoration of capitalism. We pointed out in our January article "China's Economic Dominos Has Begun to Fall" that a crisis of confidence has begun to appear in society, and just three months of development has confirmed our predictions, while the closure of Shanghai and even the Yangtze River Delta It directly accelerated this process and broke the last hope of the people for the future. In the days to come, there is an opportunity for explosive economic crisis news in China at any time. At the same time, this crisis also directly shows how much Xi Jinping has paid for Chinese society and grassroots workers in order to maintain his personal autocracy and so-called face. Capitalism worldwide is paralyzed by the crisis, and China's totalitarian rule is now exacerbating its own capitalist crisis. The only way out of this predicament is to challenge autocracy, only to overthrow capitalism and establish a truly democratic socialist system, where the working class democratically manages the economy and scientifically and democratically formulates appropriate public health policies.