Economists everywhere are obsessed with whether China can make this year’s 5.5% gross domestic product target. But two other figures will say far more about how Asia’s biggest economy might affect the global system.
The first—62 million—refers to the number of Shanghai-region residents being locked down this week to limit Covid-19 cases. The second—$46 billion—refers to how much GDP per month Hong Kong economist Zheng Michael Song thinks Covid policies are costing China.
Think about the epic scale of these numbers. The first is bigger than Italy’s 60 million population and almost in the neighborhood of France’s 65 million. Both are members of the Group of Seven nations. The second is bigger than Venezuela’s annual GDP of the Icelandic and Zambian economies combined.
All this because Chinese President Xi Jinping is sticking with a “zero Covid” strategy against which health experts, economists and geopolitical observers everywhere have been warning.
Take Ian Bremmer, CEO of Eurasia Group, who each year puts out a widely anticipated list of top risks for the year ahead. In 2021, for example, Bremmer’s biggest concern was Joe Biden’s ability to restore calm to Washington, post-Donald Trump presidency. For 2022, worries about China’s Covid policy topped the list, while Russia came in fifth.
Bremmer’s rationale: how China’s Covid absolutism would collide with increasingly transmissible variants. “The end of the pandemic will arrive soon as the virus collides with highly vaccinated populations and treatments that prevent death,” Bremmer argues. “But most countries, and particularly China, will have a harder time getting there. China’s zero Covid policy, which looked incredibly successful in 2020, is now fighting against a much more transmissible variant with vaccines that are only marginally effective.”
And here we are. News of fresh lockdowns in Shanghai belie hints that Xi’s government might pivot to a more “dynamic” strategy prioritizing testing and better vaccines over strict city-wide clampdowns.
“China’s Covid-19 lockdown of Shanghai saw oil prices slump overnight, as investors fretted about more sweeping containment measures, which would negatively impact China’s energy consumption,” says analyst Jeffrey Halley at Oanda.
This gets us back to the economist Song’s figures. Song, an economist at the Chinese University of Hong Kong, told Bloomberg and other news agencies that Xi’s lockdowns will probably cost the nation roughly 3.1% of GDP in lost output. The important caveat, though, is that the negative impact could double if Xi adds more cities to the lockdown list.
Given how risk-averse Xi is approaching 2022, this seems less an “if” than a “when.” And when that 62-million-person figure swells, so does Song’s $46 billion estimate. If things compound out from there, the global headwinds could be felt everywhere.
The good news is that Xi’s team can recalibrate if they so choose. The People’s Bank of China was ramping up stimulus before Russia’s Ukraine invasion exacerbated global uncertainty. And Xi’s government stockpiled nearly $190 billion of cash in January and February that could be deployed at any moment. Xi’s team has hinted that tax cuts may be on the way.
Yet Xi’s zero-Covid stubbornness collides with slowing growth everywhere as surging prices of oil and other commodities fuels inflation fears. Add in the Federal Reserve launching what could be a long tightening cycle and you have a near perfect storm of threats to world growth.
Another imponderable complicates 2022: how Xi’s headlong flight toward securing a third term as China leader later this year informs his priorities list. If not for this aspirational crowning achievement hovering about all Xi does, a Covid-19 pivot might’ve happened already. Xi may be loath to welcome headlines about surging infection rates ahead of coronation day.
In the meantime, economists are left to count the ways 2022 could go awry—one Chinese lockdown at a time. There also are open questions about whether surging U.S. bond yields could unnerve global markets. The Bank of Japan, too, is intervening in markets to stop interest rates from spiking.
Other potential risks include Ukraine. Xi has quite a tightrope walk between his pal Vladimir Putin and global outrage over the Russian leader’s unproved war. If Xi helps Putin evade global sanctions, U.S. President Biden and his allies might slap sanctions on the second-biggest economy.
Betting against China making its annual growth figures is often a fool’s errand. But making 5.5% in 2022 will require Xi doing the math on tradeoffs between maintaining his Covid absolutism and the GDP fallout to come.
I am a Tokyo-based journalist, former columnist for Barron’s and Bloomberg and author of “Japanization: What the World Can Learn from Japan’s Lost Decades.”
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