Zero Covid to drive China GDP growth below 4 per cent–EU Chamber

Mark O'Neill May 10, 2022 10:29

The zero-Covid policy will drive China’s GDP growth this year below four per cent and China has lost its credibility as the best sourcing location in the world, the president of the European Union Chamber in China said.

“The President has manoeuvred himself into two dead ends at once,” said Joerg Wuttke. “He cannot change his Covid policy and he cannot change anything about his friendship with (Russian President) Vladimir Putin.”

Wuttke urged China to follow the example of Singapore, whose government has adopted a policy of “living with the virus” and society has learnt to live with it.

He said that President Xi Jinping could not change his policy of zero- Covid so close to the 20th Communist Party in Beijing this autumn.
“GDP growth will be below four percent, we do not know how low,” said Wuttke. The official forecast is 5.5 per cent.

“In closed meetings, especially in ministries that deal with the economy and businesses – I meet very well-informed and open-minded top politicians. They know what zero-Covid means for the economy. It is just that they cannot use this knowledge to bring about policy change at the moment,” he said.

Nomura said last week that 328 million people in more than 40 cities across China were under lockdown. This has devastated transport of goods and people and industrial supply chains and exports. The political priority for city mayors and party chiefs is to contain Covid and takes precedence over economic growth. Their jobs and future depend on it.

Wuttke said that more and more foreign companies were telling him that they were trying to move their supply chains to other countries. “China has lost its nimbus as a base for sourcing and manufacturing, at least for the moment.”

In a survey published last week by the EU Chamber, 23 per cent of 372 European companies said they were considering a move out of China, the highest level in a decade. “Businesses need a road map for exit from the zero-Covid policy,” Wuttke said. “The predictability of the Chinese market is gone. That was the strength of China, its policy was always rational. This new dimension is like whack-a-mole.”

Of the firms, 75 per cent said the government needed to move away from the current draconian zero-Covid policies.

Another headache for European companies in China is Russia’s invasion of Ukraine, especially those who transport goods to and from Europe by railways that cross Russia.

BMW Group and Audi have suspended shipment of cars by rail from Germany to China, the biggest market for both automakers. Instead, they are sending them by ship from the German port of Bremerhaven, a journey that takes several days longer than by rail.

While the two supply the Chinese market largely from factories within China, they also export a significant proportion from Germany.

Transport through Russia carries an increased risk – the government could confiscate the goods in retaliation for Western sanctions and many insurance companies are no longer willing to cover goods sent through Russia.

Some local authorities in China have begun to help shippers with war insurance cover for goods going to Europe from their jurisdictions.

Wuttke said that members of the leadership in Beijing did not understand why the war and China’s closeness to Putin was such a stress for European companies. “They do not understand what Putin has triggered in European corporate headquarters. Nor do they understand that, from a Western perspective, there is a connection between Ukraine and Taiwan.

“They do not realise that Western companies are grappling with the scenario that they would have to leave China – just as they are now leaving Russia – if China tried to forcibly integrate Taiwan … Foreign companies are hitting the pause button. New investments are suspended for the moment,” he said.

In the EU Chamber survey, 33 per cent said that the Ukraine war had made China a less attractive investment destination. “The war is exacerbating challenges faced by businesses as supply chains disintegrate,” the Chamber said.

“Nearly two thirds of respondents have faced disruption transporting goods to and from Europe. Rising material and energy prices have also affected more than half of European companies,” it added.

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Mark O'Neill

A Hong Kong-based writer, teacher and speaker.