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China’s zero-COVID policy is shattering global hopes for a quick economic return to normal

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A sharp slowdown in China’s economy, caused by its strict zero-COVID rules, and Beijing’s shift away from its traditional reliance on external demand have cast doubt on how much the country will contribute to future global trade and investment.

While China recovered remarkably quickly from its initial pandemic slump thanks to record exports and factory production, analysts expect the current downturn will be harder to shake off than early 2020.

The bleaker outlook poses challenges not only for Beijing leaders worried about rising unemployment, but also for foreign companies who are counting on China to resume the engagement with the rest of the world it had before the pandemic.

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Calculations based on International Monetary Fund forecasts show that China’s expected average annual contribution to global economic growth through 2027 will be around 29%. While that’s a sizeable gain, it contrasts with the years following the 2008 global financial crisis, when the average was closer to 40%.

ANZ chief Greater China economist Raymond Yeung said Beijing’s economic policy has more recently shifted toward domestic solutions and reforms, rather than resuming the earlier model that focused on greater engagement with the world.

“The successful implementation of these can pave the way to sustainable growth in the long term,” Yeung wrote in a note. “However, the risk of not achieving a similar growth rate is higher. If MNCs (multinational corporations) start withdrawing their shore presence, the process of economic convergence could end sooner than expected.”

China’s export growth slowed to single digits in April, the weakest since the pandemic began, while imports were little changed as COVID-19 containment halted factory production and slumped demand.

Authorities are expected to embark on a cautious policy stance on COVID ahead of a key Communist Party meeting later in the year.

As a sign of that caution, China last week gave up hosting rights for next year’s Asian Cup soccer finals due to COVID concerns.

Peiqian Liu, China economist at NatWest Markets in Singapore, said that given the election, Beijing is likely to prioritize maintaining victories in hard-fought battles against COVID and rampant debt over its 2022 growth target of 5.5%, which many analysts are pushing consider ambitious.

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“Broadly speaking, as early as 2018 there has been a long-term shift to a more domestic economy that has boosted the service sector and modernized the manufacturing supply chain, (and) turned away from debt-fuelled stimulus and growth,” Liu said.

A broad and prolonged slowdown in investment would weigh on demand and contribute to a deeper slowdown in global growth, she said.

IMMEDIATE CONCERNS

Beijing has defended its policies and downplayed the global impact. An opinion piece by the state-run Global Times said last week that zero-COVID was the most appropriate strategy to fight the virus and keep the economy stable, and expected continued strong contribution to global growth.

Others broadly agree – Brian Coulton, chief economist at Fitch Ratings, acknowledged the disruptions from zero-COVID but did not see it as a more serious drag on global growth.

“If anything, the rest of the world’s reliance on Chinese manufacturing has increased in recent years, so I don’t see China’s grip on the global cycle easing in the near future anyway,” Coulton told Reuters.

For now, however, foreign companies in China have been vocal about the deterioration in operating conditions.

Under the zero-COVID policy, Chinese citizens have enjoyed a long period of relative openness and freedom within the confines of the domestic economy, but have remained tightly sealed from the rest of the world.

However, more recent domestic outbreaks have meant authorities have not only locked down large swaths of manufacturing, contributing to global supply shocks, but also doubled restrictions restricting people from entering and leaving the country.

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While travel restrictions are being eased in much of the rest of the world as countries try to “live with COVID,” China said last week it will severely limit unnecessary outbound travel by its citizens and continue an effective freeze that has been in effect in the past 2 years.

The American Chamber of Commerce in China on Tuesday warned that tight COVID-19 controls would hamper foreign investment in the country for years to come as travel restrictions block the pipeline for projects.

A survey by the Association of German Chambers of Industry and Commerce (DIHK) last week showed that 47% of German companies in China are critically rethinking their activities there and one in eight companies is even considering leaving the country.

“It usually takes years to establish oneself here, and given the size of the country, moving is all the more difficult the more astonishing the survey result is,” said Volker Treier, head of foreign trade at the German chambers.

(Reporting by Stella Qiu in Beijing, Tom Westbrook in Singapore, and Christian Kraemer in Berlin; Additional reporting by Mark John and Howard Schneider; Writing by Sam Holmes; Editing by Kim Coghill)

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