(The original article in Japanese was posted on May 13, 2022)

The influence of the “zero-COVID” strategy of the Chinese authorities is manifesting themselves with as large scale and severity as they had been feared. The number of cities under the strict control has exceeded 20 since this March, including Shanghai, Shenzhen, Shenyang, Dongguan, Changchun, and Xi’an. Prolonged strict behavioral restrictions in urban areas, which are supposed to encourage people’s consumption, are having a serious impact on supply chains throughout the country as well as shrinking overall domestic demand in China.

Automobile sales epitomize this negative influence. According to the China Association of Automobile Manufacturers, new vehicle sales in April this year fell to about 50% of the previous year. The reasons are factory shutdowns, logistics disruptions, and customer absences in the blockaded areas.

Nevertheless, there were some movements toward resumption of production in Shanghai in late April. Access to and from the factories and the outside still remains restricted. This means that full-scale operation is not possible without having accommodations of a certain size or larger at the factories. Meanwhile, the logistics industry has launched the system of “Priority Goods Transport Vehicle Pass,” and the transportation of goods across provinces has started. However, due to a manpower shortage and other factors, transportation costs now are also several times higher than usual, and the situation is far from going back to normal.

The impact of the “zero-COVID” strategy is not limited within China. According to the General Administration of Customs of the People’s Republic of China, rate of year-on-year export increase in April plunged 3.9% from 14.7% year-on-year increase in March, marking the lowest growth rate since June 2020. Meanwhile, imports also remained weak at $222.5 billion, down from $228.7 billion in March that was the first negative growth since August 2020. In other words, the flow of goods from other countries to China was sluggish at the same time as the drop of the value of shipments from China (“Made in China” products). Cargo destined for other countries has not been reaching the ports at all, and in addition, the entire port system has been dysfunctional, with unloading operations stalled due to a labor shortage and cargo held up due to decreased transportation capacity. The impact on Japanese companies is also significant.

As the situation became more protracted, objections to the “zero-COVID” strategy began to emerge not only from other countries but also from within China. However, there is a persistent view that “the current national leadership will not admit its mistakes and change its policy” before the National Congress of the Chinese Communist Party that will be held in this autumn. The message issued by the Chinese authorities that “responsibility for the spread of infection caused by negligence of duty will be strictly held accountable” is an absolute guideline for actions of local government officials. As long as the “zero-COVID” strategy continues, it must be said that it is a long way off for the situation to go back to normal. That being said, if the Chinese economy is rapidly recovered, it also will be a risk for the world. The return of huge demand should lead to global supply shortages in energy, food, materials, and logistics, and will contribute to a surge in commodity prices arising from the Russian military invasion. In any case, in parallel with dealing with the turmoil that we are facing, we need to prepare strategic scenarios for the risks that will come “down the road.”

This Week’s Focus, May 13

Takashi Mizukoshi, the President