China battles recession, insists on costly ‘zero Covid-19’

BEIJING (AP) — China’s leaders are trying to reverse an economic recession without giving up on an anti-virus strategy to shut down Shanghai and other cities, adding to the challenge of President Xi Jinping as he tries to extend his time in power.

The ruling Communist Party has declared its “coronavirus zero” goal of preventing all infections to take precedence over the economy. It was a decision with global ramifications, although experts, including the head of the World Health Organization, have warned that the goal may not be achieved.

“We don’t think this is sustainable,” WHO Director-General Tedros Adhanom Ghebreyesus said on Tuesday.

Until the beginning of the year, the number of infections in China remained low, with a strategy of closing cities, but costs soared. Beijing has turned to “dynamic clean-up,” or locking down buildings or communities, if an infection is detected. But thousands of new cases of the highly contagious omicron variant are reported every day, keeping most of Shanghai’s 25 million people at home. Much of Beijing and other cities with tens of millions of people have also been closed.

That has disrupted manufacturing, hampered the global flow of goods from smartphones to iron ore, and raised inflation risks in the U.S. and Europe. Weak consumer spending has cooled China’s import demand.

The ruling party has promised tax refunds and other aid to struggling entrepreneurs, who Beijing relies on to create jobs and wealth. Premier Li Keqiang, the No. 2 leader, warned last week that the employment situation was “complex and grim.”

At a cabinet meeting on Wednesday, Li Keqiang called on officials to focus spending and credit policies on preventing job losses, according to state television and the official Xinhua news agency. They did not elaborate on possible new moves.

Despite pledges of aid, forecasters say economic growth this quarter will slow to 1.8% a year ago, from 4.8% in the previous quarter. Growth for the full year is expected to be as low as 3.8%, below the ruling party’s official target of 5.5% and less than half the 8.1% growth rate for 2021.

“The Chinese government is willing to make some short-term sacrifices for the economy in exchange for long-term growth,” said Lu Ting, an economist at Nomura. However, he said, “Achieving ‘zero COVID’ is very challenging because omicron is more contagious.”

A foreign ministry spokesman on Wednesday defended China’s approach as realistic.

China’s strategy is “not to pursue zero infection, but to control the epidemic in the shortest possible time with the lowest social cost,” Zhao Lijian said. “The vast majority of people in most parts of China live and work normally.”

Complaints about food shortages and other hardships and videos posted online showing people arguing with police in Shanghai and other areas have been removed by censors.

Public frustration and economic damage spell trouble ahead of the ruling party’s national congress in October or November, where he is expected to try to break with tradition and grant himself a third five-year term as leader.

The most dominant Chinese leader since at least the 1980s, Xi Jinping remains on track for re-election. But experts say rivals could gain leverage to erode his power. Proponents of market-economy reforms also want to dismantle policies that favor state-owned industries and tighten control of the private sector, China’s economic engine.

Diana Choyleva of Enodo Economics said in a report that wrangling over the cost of an anti-virus strategy “provides an opportunity for his factional opponents” with “deeper ties to the business sector”. “They understand better than Xi and his supporters the impact of a zero outbreak on the economy and middle-class citizens.”

Choyleva said the private sector is weakening, with 4.4 million companies closing last year while only 1.3 million new businesses opened, down from 13.8 million in 2019.

COVID restrictions have closed factories or suspended access to manufacturing hubs in the automotive, electronics and other industries, including Changchun and Jilin in the northeast and Guangzhou and Shenzhen in the south.

In downtown Zhengzhou, the Xiaonanguo restaurant closed on May 4, but was still paying 100 employees, according to one employee, Wang Huiqin. Before restaurants in the city of 13 million were told to stop offering dine-in services, business was down about 40 percent, she said.

“If this situation persists for a few weeks, the company can handle it,” Wang said. “If it lasts longer, there will be problems because the cost is so high.”

In Shanghai, most businesses have closed since late March, costing an estimated tens of billions of dollars in monthly activity.

Freight volumes at the world’s busiest port of Shanghai fell by 30%. Economists say foreign customers are looking for non-Chinese suppliers who may be more likely to deliver but charge more.

“This will further increase the risk of stagflation in Western economies this year,” said Tommy Wu of Oxford Economics, referring to a scenario of higher prices and lower economic activity.

Export growth fell 3.7% in April from a year earlier, down from 15.7% in March. Imports rose 0.7%, in line with a sub-1% increase the previous month.

China is the only major economy to grow in 2020 after Beijing closed factories, shops and offices across the country to fight the virus. The ruling party declared victory a few months later and reopened the economy.

Last year, Xi Jinping’s government pivoted back to a long-term plan that included trying to reduce excess real estate debt. That sparked a slump in construction and home sales in mid-2021.

In a sign of growing economic pain, Beijing has faced calls from foreign companies that typically refrain from questioning official policies for fear of retaliation.

The American Chamber of Commerce in China said its members wanted a “better balance” between disease prevention and business.

Of the 121 companies that responded to the April 29-May 5 survey, more than half delayed or reduced investments, according to the chamber.

“Members don’t see any light at the end of the tunnel,” Chamber of Commerce President Colm Rafferty said in a statement.

At a meeting on May 5, party leaders appeared to reject such calls and the “living with the virus” stance taken by other governments.

In a statement, they said loosening virus control measures would lead to “massive infections, severe illness and death” and “significantly impact” the economy. To wrap up the debate, it said “all sectors of society” should “unify thought and action” with party leaders.

Instead of abandoning their growth targets in pursuit of “zero Covid-19”, party leaders “want both”, Macquarie Group’s Larry Hu and Xinyu Ji said in a report.

“No coronavirus at the expense of soaring unemployment is a tough sell for China’s top leaders, especially in such a politically important year,” they wrote.

This week, the Ministry of Industry and Information Technology asked local governments to help entrepreneurs pay rent, utilities and other expenses. It warned that “the production situation is not optimistic.”

“We urgently need to take further effective measures,” a statement from the ministry said.

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Associated Press researcher Yu Bing contributed.

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