There is widespread relief at the prospect of a more predictable operating environment and the resumption of connectivity with the rest of the world since China dropped its zero covid policy. Recovering the more robust levels of confidence common among foreign investors pre-2019 will now need to be the goal if China seeks to capitalise on its reopening, stabilise, grow levels of inbound investment, and return to the “new normal” of annual GDP expansion of 5% or above.

Initial signs of recovery are beginning to emerge as China’s economy begins to come back to life after a year of heavy disruption. Fortunately for the economy, the impact from the first wave of infections arrived early enough in December and January for the process of recovery to capture a significant chunk of the annual Spring Festival boost to travel, leisure and consumption more broadly.

Travel rebounded strongly over the seven-day holiday up 50.9% on 2021, though still significantly lower than 2019 trip volumes (47%) according to the Ministry of Transport. The box office also sprung back to life with around $1 billion generated over the seven-day national holiday, aided by a strong line-up of domestic films and beating 2019 takings. Data from Meituan indicates a recovery of China’s restaurant sector has also started, with Spring Festival revenues for some chains already recovering to pre-pandemic levels.

Signals from China’s leadership such as China’s Vice Premier Liu He’s Davos speech, which included a declaration that China’s economy ‘will get back to normal in 2023,’ have also added further fuel to the relief rally. As have the recent approvals for foreign finance firms to set up or acquire wholly owned mutual funds as well as securities brokerages. One interpretation of this sudden raft of approvals is that they are evidence of a more welcoming stance toward foreign business (and the private sector more broadly). Foreign investors, however, continue to hold a range of concerns that will be more challenging to shake off for the economy than the reversal of zero covid has proven to be, or the lower-hanging fruit of granting approvals.

Boardrooms are asking more questions of China as the number of fronts that present risk or uncertainty has grown. Whether regulatory, geo-political or the shock of zero covid on the operating environment and supply chains, decision-makers will need to recover the belief that China presents not just growth potential but a predictable enough environment to invest long-term.

Relations have been strained between China and several of its closest neighbours, as well as some of its largest trade and investment partners, including the US, Europe, Canada and the UK. Reducing diplomatic tension will have a positive knock-on effect on foreign businesses that have consistently listed geopolitics as a key factor affecting decision-making since 2018 and the onset of the US-China trade war.

A recent PwC survey of CEOs in China indicates a high degree of concern about the long-term viability of their business models in large part due to the shifting geopolitical landscape and the uncertainty that has formed as a result. Geopolitical conflict sat in third place on the list of business risks that CEOs globally are bracing for over the next 12 months and five years respectively, sitting behind only inflation and macroeconomic instability.

China’s recent efforts to reengage with international partners, including Chinese Xi Jinping’s attendance at the November G20, the healing of relations with Australia and the rush of outward official visits expected to take place in the months following Spring Festival, are all encouraging signs. The lack of interaction between the governments of the UK and China, for example, has created a void in recent years where normally there would be regular engagement at both senior and working levels. Resuming dialogue while accepting both sides will continue to have, at times, significant differences, will be a crucial step to rebuilding trust and constructive exchange.

Foreign investors will also be watching closely for signs the economy remains a high priority. The sudden nature of the restrictions imposed on the education sector, for example, sent a chill through the economy and left many businesses concerned their sector might be next in the firing line. Providing businesses with greater transparency and advanced consultation on decisions regarding future legislation or adjustments to rules and regulations will help create a more predictable environment and contribute toward restoring trust among investors. Continued steps toward increasing market access and tackling business environment issues will also play a big role.

Regarding the economy, strong growth appears possible in 2023 with projections generally falling between 4% and 5.5%. The second quarter in 2023 is likely to be a bumper one with growth potentially into the double-digits given the low performance of the second quarter of 2022. Although down to an accounting quirk, this will present an opportunity to signal China’s pro-growth stance and provide further evidence of the strength of recovery to the international business community at a time when the global economy is likely to be struggling for positive narratives. The upcoming Two Sessions in March also provides an opportunity to provide reassuring signals to investors.

If strong economic growth is to be a priority for China over the coming years, then recovery of investor confidence will need to feature high on the list of short to medium-term objectives. Any recovery of sentiment, however, will take more than just one of the factors highlighted above to succeed. China’s management of its economy and business-related policies will play a significant role, but unless the backdrop of heightened geo-political tensions eases, uncertainty will persist and continue to weigh upon decision-making for investments, supply chains and any exposure to China more generally.

Initial signs suggest the cautious optimism for 2023 that is increasingly prevalent among foreign business is not misplaced. For board room-level confidence to return, it will require China to take a sustained, collaborative and transparent approach in addition to the return of long-lasting strength in the economy beyond the inevitable bounce from reopening.

The coming months will show what China’s post-zero covid “reset” will mean for business and perhaps provide an early indication of what to expect over the longer term. Foreign investors will be hoping for more efforts to promote confidence and trust in the operating environment for international business, a strong focus on restoring stable long-term growth and predictability in the Chinese economy, alongside visible efforts to dial down geopolitical tensions.

This article was originally published by Caixin as “Opinion: to Capitalise on Reopening, China Needs to Rebuild Investor Confidence”

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With restrictions removed, wave one saw covid spread at an unprecedented speed and scale, with 80% of the population estimated to have been infected with the virus. China’s healthcare system was pushed to new limits with death rates rising through December and early January. However, as Spring Festival approached, official figures indicated hospitalisation rates dropped by 85%, with fears of a second wave of infection triggered by holiday travel ultimately unfounded.

Despite tragedy hitting many families across the country, normality has nevertheless largely returned to life across China. The initial sense of relief at re-opening and fear of the implications of Covid’s unrestricted spread soon turned into a desire to reconnect with family and friends, travel, shop, eat and drink and try to put the last twelve months to the side.

Much of China’s initial rebound in activity was inevitability going to be visible in sectors artificially depressed by restrictions. However, the sharpness of the rebound in travel, leisure and consumption more generally during Spring Festival has exceeded even the most upbeat expectations.

Domestic air travel over Spring Festival was up 50.9% on 2021 though still significantly (47%) lower than 2019 trip volumes according to the Ministry of Transport. Overall, 226 million trips by road, rail, waterway and air were recorded during the week-long national holiday. Meanwhile, revenues in the tourism and hospitality sector over the seven-day period recovered to 80.7% of pre-pandemic levels.

Thailand found itself back at the top of China’s outbound tourism destinations, with two of the three most visited locations being Bangkok and Phuket. Thai visa applications have surged by 300% year-on-year, while purchases of Thai tourism products jumped by 1,000% according to Alibaba.

The cinema box office also sprung back to life, with around $1 billion generated over the seven-day national holiday, aided by a strong line-up of domestic films and beating even 2019 takings. Data from Meituan suggests the recovery of China’s restaurant sector has begun too, with Spring Festival revenues for some chains already recovering to pre-pandemic levels. Immediately following the holiday, the IMF moved to revise their GDP growth projections from 4.4% to 5.2%.

If China’s reopening is the big economic story of 2023, then consumption is taking the lead role. Fuelled by record savings rates and supportive government policies, consumption looks set to have a bumper year as revenge spending kicks in and appears likely to rise over the course of 2023. Consumption has been deemed the primary economic ‘driving force’ as the government seeks to both recover activity in the short term and rebalance the economy over the long term. Foreign producers and exporters of consumable goods with exposure to Chinese consumers are likely to see upticks in demand as a result.

China’s outlook isn’t without risks, and the best case is not lacking in potential headwinds. The real estate sector and its associated industries, which contributed 24.2% of China’s GDP activity in 2019, still presents a significant concern. With private real estate developers in crisis mode and property prices falling in riskier areas such as city outskirts or lower-tier cities, the government will need to continue its balancing act to ensure a deeper crisis is avoided.

Exports are also increasingly in the spotlight despite being a rare bright spot throughout the pandemic, reaching a record surplus of $877.6 billion in 2022. However, October 2022 saw demand fall by -0.3%, before November (-8.7%) and December (-9.9%) saw the rate of contractions accelerate sharply. With growth in overseas markets expected to continue to struggle and demand expected to remain soft in the first half of 2023, China’s exports are likely to continue to struggle.

Whether a bumper first quarter boosted by a rebound in consumption proves to be the catalyst for a return to sustained levels of strong growth is yet to be seen. Headwinds such as real estate and exports will likely drag on growth in 2023. Though with intervention so far avoiding a deeper property crisis and demand for Chinese exports in the global south rising, the potential risks associated may be mitigated. Consumption will be the main driving force for growth, and with the IMF raising its growth projection from 4.4% to 5.2% will play a key role in how the Chinese and global economies perform in 2023.

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Why the sudden change?

The 180-policy reversal seems to have been prompted by three main factors: a major outbreak in Beijing, growing frustration at zero covid (and hard lockdowns in particular) and recognition of the low health risk omicron presents to the population.

A plan to shift away from zero covid was likely already being considered (mostly likely for Spring 2023) but was fast-tracked after covid slipped out of control in Beijing and authorities found they could no longer turn to hard lockdowns. The demonstrations over the weekend of 25-27 November thus played a small but significant role in bringing about the shift in policy by removing hard lockdowns from the policy toolkit.

The economic impact was likely a secondary factor. After all, China has been unflinching in its willingness to weather the economic impact of zero covid over the last three years – and especially so over the course of 2022. The economic issue is also neither new nor surprising (as CBBC members can attest) so doesn’t explain the sudden change of strategy. The preferred approach of the Chinese government would likely have been to weather a few more months of pain to see out the winter, but circumstances had other ideas.

The first post-zero covid wave

With the end of mass testing and the reporting of community cases, it is difficult to get accurate data on infections. However, China is clearly experiencing its first major population-wide wave of covid. Informal surveys conducted by Beijing residents indicate infection rates of between 40-60% of the city’s population within just the last couple of weeks.

We are also hearing reports of companies with cases among as many as 50% of their Beijing staff. Positive infections are now so commonplace in Beijing and across China that people are posting their positive test results on WeChat without any of the fear or stigma previously associated with catching covid. The shift in perception towards covid is staggering to say the least (and certainly very welcome).

Home quarantine is now the standard way for people to recover, with only the most serious cases being admitted to hospitals. Fever clinics have been set up in over 300 hospitals across Beijing, with admissions on Sunday 11 December topping 22,000 according to a report from Caixin.

The authorities are actively discouraging people from calling emergency services or going to hospitals unless necessary. This hasn’t prevented some hospitals from being swamped, although so far it appears that serious cases remain few. State media has also been working in overdrive to shift perception of covid and disrupt the cultural instinct of seeking treatment for mild symptoms at hospitals.

The expectation is that Beijing is a prelude and case numbers will soon surge in other cities across China over the coming weeks with most major cities likely a couple weeks behind. A growing number of cases are already being reporting in Shanghai. Estimates put the peak for this spike in cases at around mid-January, so we are still in the early stages of the first wave.

Dismantling zero covid

The end of zero covid means the dismantling of much of China’s zero covid industrial complex. At one point testing alone was estimated to be 1.3% of GDP. Local governments will be particularly relieved at the easing on their finances, though perhaps not those which have embarked on large zero covid-related investments sprees (e.g., building quarantine centres that are now obsolete).

Testing sites have closed, ‘dabai’ (the nickname for the epidemic prevention and control personnel who wear white hazmat suits) are seeking new employment, the national green code system for tracking travel ended on 13 December (though local HealthKits remain), tests are no longer required for domestic travel, and restrictions on the sale of flu and fever medicines have been lifted. Some restrictions remain, such as 48-hour tests to enter restaurants, bars and gyms.

Much like in the West, the use of home test kits (rapid antigen tests, known in the UK as lateral flow tests) have already become the norm. Sales of flu medicine have naturally spiked along with prices. Procuring medicine has become a challenge, with many left scrambling to get their hands on drugs.

Outlook and implications for UK business

The easing of restrictions is beginning to lift the mood among CBBC members albeit from a sustained period of low sentiment which has persisted since the Shanghai lockdown (March to June). We are unlikely to see a sharp rebound in sentiment but rather a gradual recovery over the coming six months as we get through the first wave of infections and further announcements are made regarding the easing of international travel restrictions.

Coexistence with covid brings a new set of issues for businesses to manage. The risk of infection has increased significantly for UK businesses operating across China as the first major wave makes its way through the population. To mitigate, companies are shifting to flexible working, updating their covid prevention measures, and procuring flu medicine and test kits for their staff.

The easing of restrictions also means the likely return of international travel to China. For the first time since China’s borders closed in March 2020, we believe UK businesses can begin to plan with confidence to visit China during 2023.

Quarantine remains 5+3 (hotel + home) at the time of writing, although we expect this will ease in the coming months, with a full removal of hotel quarantine potentially by the summer. This will likely lead to a sharp uptick in business travel, delegations and tourism. It also bodes well for the prospect of a return to ministerial visits and potentially a resumption of UK-China Government exchanges such as the Economic & Financial Dialogue and JETCO.

The end of zero covid also removes a significant risk factor for business operations and production, logistics and supply chains in particular. Zero covid disruption has been high on the risk index for businesses over the last three years since the initial outbreak, and even as recently as November major companies like Apple were dealing with severe disruption to their supply chains in China.

While we can all breathe a sigh of relief at the end of zero covid, new uncertainty will emerge over the coming weeks and months as cases spike across China. Regardless, the prospect of a return to normality is very much welcome as China begins to reopen and reconnect with the rest of the world.

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On 11 November, the China National Health Commission released a list of 20 adjustments to the country’s Covid-19 prevention and control policies. The adjustments relate to both the domestic-level implementation of Covid policies and international travel, including shortening the length of hotel quarantine for international arrivals and reducing the pre-travel PRC test requirements.

Below are the policy adjustments that relate to international travel:

• The quarantine requirement for inbound travellers has been reduced to 5 days of centralised (i.e., hotel) quarantine plus 3 days of home quarantine (previously 7 days of centralised quarantine and 3 days of ‘home health monitoring’)
• Only one negative nucleic acid test is required within 48 hours of boarding a flight to China
• The circuit breaker mechanism for inbound flights, which saw flights cancelled if they had a certain number of positive Covid cases, has been abolished
• According to the Chinese Embassy in the UK, there are no additional prevention and control requirements for people with uncertain test results, close contacts, a history of Covid infection or suspected symptoms. The above groups can now apply for the health code based on a negative nucleic acid test report within 48 hours before departure.

Read the latest notice on pre-travel testing requirements from the Chinese Embassy in the UK here.

Domestically, quarantine for close contacts was also reduced to 5 days of centralised quarantine plus 3 days of home quarantine. In addition, secondary contacts (close contacts of close contacts) no longer need to be identified. The categorisation of Covid risk areas has been simplified to just “high risk” and “low risk” (i.e., Covid cases present vs no Covid cases present) and mass testing across whole districts or even cities has been discouraged unless the origin of new infections is particularly unclear. The apparent goal of these adjustments is to avoid sweeping lockdowns for one or two Covid cases.

These policy adjustments do seem to make China’s Covid rules slightly less draconian. However, as case numbers increase across China in November 2022, it is likely that the implementation of these policies will vary at the local level, so both domestic and international travellers are cautioned to stay abreast of the latest developments.

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“Our prevention and control strategy is determined by the Party’s nature and mission, our policies can stand the test of history, our measures are scientific and effective,” said state media after a meeting of the Communist Party’s governing Politburo Standing Committee on May 5th. Reading between the lines: the Party considers Covid to be an existential threat, not just to itself and its rule, but, as far as the government is concerned, the continuation of the Chinese nation-state. That is the logic informing China’s zero Covid strategy, and it goes a long way in explaining why the policy will not be disappearing anytime soon. 

There has been some public debate in China surrounding whether the country should 躺平 (tang ping) or ‘lie flat’, and accept that choosing to live with the virus risks a surge in Omicron cases that would overwhelm China’s intensive care unit capacity by as much as fifteen times. These voices are quickly quashed by the politics, however, as faith in the Party trumps science. 

This Policy Update explains the rationale behind the Party’s decision to stick with a zero Covid strategy while shedding light on how it is changing everyday life in the country. 

Background 

To borrow the smoker’s old adage, defeating Covid is easy, China’s done it many times already. Back in April 2020, for example, air-raid sirens blared and car horns were honked as people took to the streets in jubilation to mark the official end of the Battle to Defend Wuhan. Two years later, as the state media now speaks of further battles to defend Shanghai and Beijing amid a spate of Covid outbreaks in China’s two largest cities, previous declarations of freedom from Covid could start to ring hollow and risk the public wondering whether the Party is suffering from a case of premature emancipation. And looking ahead, if there are more battles in the second half of 2022, the masses may even edge closer to questioning whether President Xi really is the new infallible “Great Helmsman” that propaganda organs are busy positioning him as ahead of his election to an unprecedented third term in the autumn.

There are also compelling scientific reasons for China to maintain a zero Covid strategy. Firstly, some 52 million people over the age of 60 are yet to receive two jabs of the various indigenously-developed vaccines that regulators have approved for use in the country. A fact that is worsened by China having elected not to approve any foreign-developed mRNA vaccines for domestic consumption (the regulators approved two China-made mRNA vaccines to enter clinical trials in April 20224 ), while its Sinopharm and Sinovac vaccines are only as effective as BioNTech’s mRNA vaccine across all age groups after three shots. Secondly, China lacks the intensive care facilities it would likely need to cater for a massive spike in Covid cases. A recent study carried out by researchers at Fudan University models that hospitals would end up at 15.6 times overcapacity, resulting in 1.55 million excess deaths. 

Testing times call for testing measures 

As Shanghai enters its seventh week of hard lockdown, with residents confined to their apartments and those found either to have Covid or be a ‘close contact’ with someone who has, through daily mass testing, being sent to centralised quarantine, commentators are wondering whether what is currently happening in Beijing is indicative of China’s zero Covid future. 

Beijing residents are currently obliged to turn out for testing every day, and there is a requirement to show that a test has been taken in the preceding 48 hours in order to enter any public spaces (people have also been instructed to work at home, while inside dining is no longer permitted, taxis cannot take passengers across district lines, and all non-essential shops have shut). At the time of writing, the city has managed to avoid going into a hard lockdown, and cases hover around 50 per day; people are still free to leave their apartments to go to the supermarket and exercise. 

Tensions are running high in the capital, however. Beijing residents worry that their city could soon succumb to an extended lockdown. On 12th May, fears that the Beijing government was about to announce a three-day lockdown gripped Chinese social media platforms after the start of the city’s daily Covid press conference was delayed by an hour; netizens couldn’t help speculating that the city was going to follow Shanghai down a path where a three- or four-day lockdown turns into a never-ending one. 

Meanwhile, testing appears to have become a part of daily life even in areas that are supposedly Covid-free. Jiangxi Province as well as the cities of Jinan in Shandong Province and Yulin in Shaanxi Province, for example, have all announced that they will test all their citizens on the same schedule as Beijing, even though their respective governments have not reported any cases. Finally, even though life has reportedly returned to normal in Shenzhen after the city exited a lockdown, there is still a requirement to provide proof of a negative test taken in the preceding 72 hours in order to enter public buildings or use public transport.

Economic impact 

The lockdowns are having an enormous impact on the country’s economy, particularly in terms of supply chains, logistics, and the country’s labour force. 

Shanghai is home to one of the world’s busiest ports, yet hundreds of ships are currently anchored off its shores, unable to offload their cargo. Furthermore, even when companies can unload the components they need for manufacturing or the products their customers have ordered, they cannot get the permits required to move them off the dock, across the city, or into other parts of China. Supply chains are under considerable strain nationwide as a result. 

Meanwhile, with lockdowns shuttering factories in city after city, the country’s 300 million migrant workers that comprise the country’s informal economy are locked out of economic life with no alternative other than to go back to their family farms and a subsistence way of living. That is significant because 60% of China’s labour force works within the informal economy, and the unskilled service sector is the fastest-growing part of the country’s labour force as a whole. While it is too early to tell the full extent of the impact of a zero Covid strategy on the country’s economy, it is likely that the informal economy and migrant labourers might feel the effect for years to come, not least because of the influence it will have on industrial productivity. 

China’s Covid end game 

At present, there appears to be no clear way out of Covid for China. The country has not approved foreign mRNA vaccines for use, nor has it socialised the idea of living with the virus among the public. So, how might the government resolve the situation? These are the front runners among China watchers:

• The government very gradually eases the restrictions people are facing without stating that it is abandoning its zero Covid strategy
• After the National Party Congress this Autumn, and President Xi’s election to a third term, the government becomes more relaxed about Covid and eases the restrictions fairly quickly
• The World Health Organization downgrades the status of Covid, declaring the ‘Pandemic’ over 

The CBBC View 

Zero Covid is clearly here to stay, so CBBC has been working actively to support members by: 

• Sending a letter to Minister Wang Wentao of the Ministry of Commerce (MofCom) outlining the specific issues members are facing as a result of the lockdown measures. A copy of the letter was also shared with Mayor Gong Zheng at the Shanghai Municipal Government
• Meeting with the MofCom department for Foreign Direct Investment
• Holding a series of sectoral roundtables considering how the Shanghai lockdown has affected companies in the city and across the country more broadly, and exploring mitigatory measures.

Entering China is a key decision for businesses of all sizes. Call +44 (0)20 7802 2000 or email enquiries@cbbc.org now to find out how CBBC can provide you with the platform to unlock your potential.

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Worries about the Chinese economy are mounting. Despite respectable growth of 4.8% for the first quarter, several indicators paint a more sombre picture. Consumption data, in particular, rattled policymakers. In March, the retail sales of consumer goods decreased by 3.5% year-on-year, down from a 6.7% increase in the first two months of the year. 

Last month’s data confirmed Beijing’s concerns. April’s Purchasing Manager Index (PMI) – which measures the Chinese manufacturing sector – dropped to 47.4, the lowest figure since the beginning of the pandemic. Export data, too, weakened in April, growing only 3.9%, the lowest monthly growth since June 2020. 

To stabilise the economy, the Chinese government has issued several guidelines ahead of this year’s Communist Party Congress, which is expected to select President Xi Jinping for a historic third term. Yet while most of the recent announcements targeted infrastructure and job security, it will probably fall – once again – onto China’s strong export sector to save the economy and lead the recovery.

Background 

Though recent figures may still be a far cry from the dramatic slump during China’s first lockdown, the global situation is much less favourable than it was in early 2020. Back then, most countries were just about to enter lengthy lockdowns themselves. Central banks around the globe were switching on the money printers to keep their economies from collapsing, and customers in advanced economies had cash to spend, as they were saving on commuting costs and other expenses. Now the situation is exactly the opposite. Most developed economies have exited lockdowns and are returning to pre-pandemic levels of economic output, monetary supply is tightening, and soaring inflation is squeezing households. 

And it’s not just Chinese policymakers that are worried. Foreign businesses and investors are also growing weary of the country’s economic troubles. A recent flash survey by the European Chamber of Commerce in China (EUCCC) showed that nearly 60% of participating companies had reduced their revenue predictions for 2022, and about a quarter were considering shifting investment to other markets. In February and March, foreign investors pulled out of RMB 193 billion (£23.3 billion) worth of Chinese bonds – the greatest outflows since the beginning of China’s bond market. At the same time, early-stage investment by VCs declined by 90% year-on-year in the first quarter of 2022. 

To reverse the trend, the Chinese government has released a series of policy guidelines to stabilise the economy. Four areas are crucial: infrastructure, domestic consumption, jobs and trade. This update will look at each of them and highlight the key challenges.

Year-on-year retail sales growth (left) and 2019-2022 official manufacturing PMI (right) (Source: National Bureau of Statistics)

Infrastructure 

Since the financial crisis in 2008, infrastructure spending has been the default lever for Chinese policymakers to stimulate growth. So it didn’t come as a surprise when, on 26 April 2022, the Central Committee for Financial and Economic Affairs – the Party organ overseeing economic and financial policy – announced a slew of new measures to speed up infrastructure spending across the country. 

Most of the areas targeted relate to logistical choke points like transport networks and waterways. Logistics and supply chains were a natural victim of lockdowns with truck traffic in March 2021 dropping to 40% of normal levels. In Shanghai, traffic plummeted even further to only 15%, according to the South China Morning Post. Other areas of investment include 5G networks, renewable energy and data centres.

Improving transport links and investing in next-gen technologies, therefore, certainly makes sense. However, speeding up infrastructure spending now also means that many of the RMB 14.8 trillion yuan (£1.8 trillion) worth of planned projects will be front-loaded. This could boost growth now but lead to weaker economic activity later this year. 

Consumption 

Besides infrastructure spending, stimulating consumption is another top priority. In a strategy paper on domestic consumption published on 25 April, Covid takes the top spot. The paper outlines several measures the government should take to alleviate the damage caused by the recent lockdowns: 

• Reduce taxes and fees
• Ease access to financing and bank loans
• Suspend interest payments and fee collection (e.g. rents, electricity bills)
• Offer special support measures for retail, hospitality and tourism sectors
• Optimise online service innovation to allow businesses to stay open during lockdowns

The policies outlined here are in line with the measures taken during the previous lockdown in 2020 and conform to the Chinese government’s general emphasis on ‘supply side’ measures to support the economy. 

It remains questionable, however, whether they will be enough to ensure a speedy recovery once the lockdowns are lifted. Official data from 2020 shows that retail and hospitality sectors took much longer to recover than manufacturing, which returned to positive growth in April 2020. Retail sales, on the other hand, did not recover until August 2020. 

A recent mobility heat map shared by Natixis – a French investment bank – also indicates that it might take longer for a return to normal than in 2020. According to Natixis’s calculations, mobility across China was below the 2019 average in May for the third month in a row. By contrast, in 2020, mobility levels had returned to growth after only two months.

Employment 

Related to both infrastructure and consumption is, of course, employment. Job creation was a major theme in this year’s Two Sessions and was highlighted as a particular challenge by Premier Li Keqiang himself during his press conference at the end of the annual meeting in March. 

According to the latest data, jobs did indeed take a hit during the latest lockdown round. Urban employment rose to 6.1% in April 2022, the highest level since February 2020. More worryingly, the impact of lockdowns is now compounded by a series of long-term effects, such as the recent wave of redundancies made by China’s tech giants. According to TechNode, nearly 73,000 tech employees lost their jobs between July 2021 and mid-April 2022. 

Although current lockdown measures can probably provide occupation for some unemployed workers, the situation is expected to become graver the longer the current lockdowns last. In a statement published on 7 May, Premier Li Keqiang has warned provincial leaders of a grim outlook for China’s job market and has urged policymakers to do everything they can to ensure stable employment. 

Yet whether the country can – in fact – achieve its self-set goal of 11 million new urban jobs this year, will also depend on whether it can get China’s export machine back on track.

National mobility levels since 2020 (left) and industrial production and retail sales growth in 2020 (right) (Source: Natixis, National Bureau of Statistics)

Trade 

Chinese exports were undoubtedly the main engine of the country’s post-Wuhan-lockdown recovery. Outbound shipments soared 29.9% year-on-year to a historic level of USD 3.3 trillion (~£2.7 trillion) last year. So, given their preeminent role during the recovery, the drop in exports compared to the previous month is clearly worrying. Even though the value of exports in April – USD 273.6 billion versus USD 276.1 billion in March – remained comfortably above pre-pandemic levels, the timing of the slowdown comes at an unfortunate moment. 

As the Chinese business magazine Caixin reported, the lockdown is hitting season-sensitive industries like textile manufacturers – many of which are concentrated in the Yangtze River Delta – particularly hard. One producer told Caixin that if restrictions weren’t loosened before the end of May, his company might lose out on orders for the rest of the year, meaning that exports could suffer for the whole of 2022. 

What makes the situation worse for these industries is that other labour-intensive and export-oriented economies such as Vietnam and Indonesia are already exiting their own lockdowns and are increasing export volumes. This could accelerate the already existing offshoring trend among some Chinese industries towards lower-income countries. In this case, some jobs would then be gone for good. 

While China’s overall export levels will probably remain above pre-Covid levels this year, the potential long-term damage for Chinese exporters – and the related negative knock-on effects on employment – will put growing pressure on Chinese policymakers to find a viable exit strategy for its current Covid policy.

The CBBC View 

Getting the economy back on track will be one of the major tasks for the Chinese government in the coming months. Although there is still a huge amount of uncertainty regarding the country’s inflexible Zero Covid policy, CBBC expects economic recovery to take precedence over harsh lockdowns and quarantine rules. 

Although the current focus is mostly on infrastructure spending and consumption, we also expect that manufacturing and exports – and not domestic retail – will once again play the role of the workhorse for China’s recovery. Past experience and recent mobility data suggest that Chinese consumers will probably remain cautious and fearful of further lockdowns. It might therefore take even longer for retail levels to recover than in 2020. 

It is also worth noting that an economic recovery entails its own risks. First, there is inflation. At 2.5%, China’s CPI in April remained far below the price increases seen in North America and Europe. Without the deflationary pressure of lockdowns, however, Chinese consumers could thus be faced with similar price hikes, especially as Chinese factory prices have been consistently more than 10% higher than last year’s numbers over the last couple of months. 

And then there are jobs. The already high unemployment rate might further rise especially as tax holidays for Chinese SMEs are supposed to end in June. It is also likely that current lockdown measures mask some of the unemployment as jobless workers are mobilised to testing and quarantine facilities. 

Given these risks, it is to be expected that the Chinese government will extend tax and social insurance fee holidays beyond June and potentially launch yet another stimulus package in the second half of the year.

The post Can China really pull off Zero Covid and a stable economy? appeared first on Focus - China Britain Business Council.

Over the past two years, China has developed and managed effective Covid-19 control measures. Rapid lockdowns, quarantines, mass testing and travel restrictions have helped ensure China has been able to keep Covid-19 outbreaks under control. For everyone in China, the policies have allowed us to work and live safely with minimal risk of infection, and for our businesses to operate, albeit with barriers to travel to and from China.

China now finds itself in the midst of the worst outbreak of Covid-19 since 2020. Circumstances in China have led policymakers to maintain strict zero-Covid policies which are now affecting business confidence in the country. This follows the recent outbreaks, most notably the very challenging situation seen in Shanghai. The risks facing many British businesses operating in China today are at their highest since 2020, as a recent survey conducted by the British Chamber of Commerce in China shows.

BritCham China conducted a survey of its members from 6-14 April 2022, receiving over 200 responses from start-ups, small-medium enterprises and multinational corporations. Multinational corporations constituted 44% of the total respondents, while 43% of respondents were SMEs. The vast majority of respondents reported that their operations in Shanghai (68%), Beijing (34%), Shenzhen (21%) and Guangzhou (19%) had been the most affected. The highest representation of companies is in education (19%), followed by business advisory and business services (11%) and food and beverage (8%). 

Overall impact of Covid-19 and general outlook

The overwhelming sentiment expressed by respondents was that the impact of recent outbreaks of Covid-19 on British businesses in China has been severe: 74% of businesses reported a “very serious” or “large” impact on day-to-day business, business operations and cash flows. Almost no companies reported “no impact” or a “positive impact”.

If the current Covid-19 restrictions were to remain in place for the next year, surveyed businesses expected a reduction in:

1. Revenue and profit (68% of responses)
2. Expatriate and local staff (57% of responses)
3. Investment (34% of responses)
4. Local (China) operations (34% of responses)

Impact of Covid-19 on supply chains

Companies dealing with physical goods were, predictably, impacted heavily by Covid-19 lockdowns and control measures. “Slow, reduced or halted production or business operations due to supply chain issues” was reported by 42% of goods companies, but only 23% of companies overall.

However, in considering the future effects of Covid-19 control measures on their business, all respondents were concerned about supply chain issues, reflecting the delayed effect of supply chain disruption on the economy. A majority of all respondents (66%) expected continuing Covid-19 control measures to lead to a negative impact on their business through supply chain disruption, which was consistent across businesses of different sizes and across different areas of China.

Goods and services companies consistently reported transportation issues and rising costs as the top two factors causing disruption to their business. Goods companies also reported downstream delivery of products (32%) and the upstream supply of materials (25%) as significant pain points.

A majority of all respondents expected continuing Covid control measures to lead to a negative impact on their business through supply chain disruption

Impact of Covid-19 on labour and talent

A consistent trend that BritCham China has observed since the start of the pandemic is the adverse effects of the pandemic on hiring and retaining staff, particularly foreign staff. This is the case for the service sector in this survey, with 42% of respondents reporting a severe impact on attraction and retention of talent owing to recent Covid-19 outbreaks.

In the longer term, 72% of service sector companies reported a large or noticeable impact on the attraction or retainment of foreign talent based on China’s approach to zero-Covid. Only 7% of firms reported that their hiring and retention had not been impacted at all. For goods firms, the impact was notably less but still significant: 48% reported a large or noticeable impact on attraction or retention.

The three biggest labour-related issues were:

• Entry requirements such as pre-arrival testing and vaccination requirements
• Visa regulations
• Frequent flight cancellations

The education industry specifically stands out due to the difficulty in hiring foreign talent (74% of responses). Forecasts for the upcoming 2022-2023 school year indicate an expected turnover of at least 40% of teachers in foreign passport schools. Should they not be replaced, international families will be forced to relocate to ensure continued education for their children and those considering moving to China will look elsewhere. This will further exacerbate the flow of talent from China in the coming months.

Should [foreign teachers] not be replaced, international families will be forced to relocate to ensure continued education for their children and those considering moving to China will look elsewhere

Impact of Covid-19 on Revenue and Investment

Reduction in revenue is expected by 68% of companies. When asked about the impact of recent outbreaks on their company’s revenue projections, 60% of goods firms unequivocally stated their revenue projections for 2022 have decreased, and a further 32% said it was too early to predict. Services firms answered 51% and 43% respectively. Somewhat surprisingly, 77% of MNCs expect their revenues to decline if Covid-19 restrictions remain in place over the next year, in comparison to 63% of SMEs and start-ups.

Despite severe disruption to business activity, especially for businesses with operations in Shanghai and Shenzhen, there appears to be a tendency towards a cautious approach to revising investment plans, with one-third of respondents reporting that they had not yet decided on any change in investment. Another third of businesses responded that they had delayed investments in China as a result of recent Covid-19 outbreaks, suggesting that businesses were not proactively looking to reduce investment in China.

Nevertheless, when considering how the continuation of current Covid policies over the next year would impact investment decisions, 34% of all businesses expected a reduction in investment if present policies were maintained. The primary driver of these kinds of decisions was instability due to unpredictable and frequent lockdowns and other control measures.

How do British businesses feel about the current Covid-19 restrictions?

Given the success that China has had in managing Covid-19 in the two years following the initial outbreak, it is not surprising that many surveyed companies commended China on its effective contact tracing measures (46%), success at controlling the spread of Covid-19 (41%), and the efficient rollout of the vaccine programme (39%).

However, 33% of respondents indicated they were not satisfied with the management of Covid-19. Comments from respondents also report a sense of exhaustion with travel restrictions, exasperation with the scale of disruptions, and concerns over the continued shrinkage of the foreign talent pool within China.

Key recommendations for managing the Covid situation in China in the future

Respondents offered a number of recommendations for the management of Covid-19 in China moving forward:

• Allowing for home quarantine and/or other substitute options to centralised quarantine on arrival and for asymptomatic and close contact cases
• Allowing more flights into/out of China
• Allowing foreign vaccines into China
• Allowing family members to quarantine
  together
• Improving communications on quarantine and lockdown provisions and ensuring they are standardised across cities

As the world continues to work towards a future where Covid-19 becomes endemic, the approach to controlling the spread of Covid-19 in China is starting to have an increasingly negative effect on businesses. The question now is whether it is possible to mitigate outbreaks through measures that minimise economic and social disruption, but that protect the most vulnerable and do not compromise public health. If not, the foreign companies surveyed by BritCham China suggest that the prospect of prolonged and sporadic disruptions on business operations, people, logistics and supply chains will have significant consequences for their businesses in China.

Click here to read the British Business in China: Covid-19 Impact Report in full

The post What is the impact of Covid-19 on British businesses in China? appeared first on Focus - China Britain Business Council.

The cost of shipping between the UK and China continues to test the resilience of companies of all sizes, be they from Liaocheng or Liverpool. Shipping containers remain in short supply. As a result, the cost of securing passage on a boat from Felixstowe to Foshan, for example, has risen by over 400% since the start of the pandemic.

Many UK companies have already reported that this spike in costs has priced them out of the China market. Many more are precipitously close to following suit. The disruption created by lockdowns and port closures the world over has brought the global shipping business to its knees. Unfortunately, the industry does not look like it is about to make a hard turn to change course. 

The shipping industry finds itself caught in a vicious web. It is a business that is used to managing boom or bust cycles usually caused by increasing fuel prices or reduced consumer demand. Larger ships, fewer sailings, and significantly faster or slower journey times to conserve or burn fuel to meet projections calculated by supercomputers had become standard practice to reduce shipping companies’ exposure to such factors.

However, Covid-19 and the steps countries have taken to contain its spread – ranging from localised lockdowns to prohibiting imports – have proven to be too disruptive across too many variables. Now, the shipping industry’s tendency to operate at an enormous scale and in a highly standardised way means multiple elements of its business model are closer to the bust end of the spectrum. There is also no obvious solution to fix this sorry state of affairs. 

The UK is geographically poorly positioned in terms of shipping routes. British ports pale in comparison to the super-sized terminals at Antwerp or Rotterdam. Boasting superior infrastructure, Europe’s mega ports can unload the tens of thousands of containers a ship will likely be carrying far more efficiently. And time is at a premium. Demand for shipping is estimated to be up by 25% compared with pre-pandemic times. However, that does not translate to ships simply taking 25% longer to unload cargo or come in to dock. Ships are reportedly now sitting on anchor – often within sight of their intended port – for as long as two months, such are the delays that ports are experiencing in cargo processing. Docking used to take 24 to 36 hours in mega ports such as Rotterdam, Los Angeles or Singapore.

The shipping industry is unlikely to fix itself soon, and there is little incentivising shipping companies to dock in the UK

However, with ports now either having too many empty containers or too few of them, depending on which end of the popular US to Asia routes they find themselves, shipping lines have reportedly instructed their captains to do the following: anchor off-shore until the US can return the empty containers that are congesting American ports, or have the Asian ports find containers to fill. With California to East Asia and East Asia to Rotterdam being the two most popular routes at present, the problem for the UK is that there is little incentivising the shipping companies to dock in the UK.

The shipping industry is unlikely to fix itself soon. For example, expanding the global supply of ships would take at least three years due to the time it takes to build new ones. Similarly, increasing shipping container supply is tricky while the factories that manufacture them – and their suppliers – continue to be affected by sporadic lockdowns; the majority of shipping containers are manufactured in China. Shipping companies are anyway reluctant to order more containers, given that the problem is not so much with supply – it’s more that the world’s containers aren’t currently where they are most needed.

Nor is the East Asia to Britain shipping route likely to pick up again in any meaningful way in the immediate future. Last year, China reportedly began subsidising the ships of its state-owned shipping companies to bring back containers from the US or Europe empty because it was worried that the pile-up was putting its position as Asia’s preferred low-cost manufacturing hub in jeopardy. That does not appear to have meaningfully addressed the problem, however. The British government was also reportedly considering introducing measures aimed at controlling the increased cost of shipping to China but decided against it because it would end up artificially adjusting trade flows and could, in effect, subsidise Chinese exports to the UK to the detriment of UK manufacturers.

So, it’s choppy waters for the foreseeable future, with a short spell of British exporters having to rely on alternatives such as air freight. Without a second front of subsidies sweeping in from the East, it looks like businesses hoping that international shipping will get the wind back in its sails again will be disappointed. Unfortunately, probably only time and the resumption of normal market activity can unravel the mess that the industry finds itself in.  

The post When will shipping between the UK and China recover? appeared first on Focus - China Britain Business Council.

According to a source familiar with the matter, this timeline was set during a meeting in May amid concerns that highly contagious variants from abroad may disrupt key events like the Winter Olympics in February 2022. Government bodies did not make an official statement to confirm this timeline.

At a press conference on Wednesday, 23 June, foreign ministry spokesperson Zhao Lijian stated that “The coronavirus is still spreading in many parts of the world with the emergence of many variants. China will continue taking prevention and control measures through scientific analysis in light of the evolving situation. On the basis of ensuring safety, China stands ready to work actively to foster healthy, safe and orderly personnel exchanges with other countries.”

Other countries that have attempted to maintain zero-Covid strategies, such as Australia, have also indicated that they may not open borders until 2022.

The news comes as the southern Chinese province of Guangdong emerges from a series of outbreaks in May and June, some of which have been attributed to the Delta Variant. Experts from the Chinese Center for Disease Control and Prevention said the outbreaks should “sound the alarm” for other Chinese cities in terms of preventing the importation of variant strains.

Guangzhou reported more than 150 locally transmitted cases between May 21 and June 17, but highly targeted lockdowns and several rounds of mass testing have brought the outbreaks under control.    

China initially introduced tight border restrictions at the end of March 2020 to curb the spread of the coronavirus. In March 2021, the Chinese embassy in the UK announced that it would facilitate visa applications for non-Chinese nationals who have received at least one dose of a Chinese-produced vaccine.

All travellers arriving in China must complete at least 14 days and up to 28 days in a centralised quarantine facility depending on their living situation and final destination in China. For example, those arriving in Fujian province must complete 14 days of centralised quarantine followed by a further seven days of at-home quarantine. Nucleic acid tests to detect Covid-19 may be administered on the first, seventh, 14th, and 21st days after arrival (or more frequently if there are confirmed cases of Covid-19 on your flight).

Note: Travel restrictions are subject to frequent changes. Please check with your nearest embassy or consulate.

The post China’s border restrictions may remain in place until late 2022 appeared first on Focus - China Britain Business Council.

Since I was young I have always loved traditional Chinese culture, which I learned about from studying Chinese martial arts from a young age. For as long as I could remember, I had wanted to move to China, to experience everything I had only read about up to that point. And at 21, I finally boarded a plane and set off – since then I’ve never been out of the country for more than a few weeks.

What greeted me on arrival in China was completely different from my naive expectations. I’d chosen Shijiazhuang, the capital of Hebei Province, to be my home in China. When I arrived in September 1999, the industrial hub was grey, smoggy and not the cultural hub I had been hoping for. In fact, despite all my enquiries, finding anything related to traditional culture, or at least what I had thought that meant, was nigh on impossible.

How has technology improved cultural relations?

I adapted, settled in, found a taichi teacher and started looking for things to engage myself in. Over the years I went from kindergarten teacher to business consultant, to risk analyst for a Chinese investment firm before I decided it was time to start doing something for myself. At that point I’d been in China for about 12 years. I was out for dinner with a friend, who mentioned to me how hard it had been to find something for his visiting family to ‘experience’ in the city, as opposed to just seeing the usual sites. We talked at length about how it was still quite difficult to experience any kind of traditional culture, such as Chinese painting or calligraphy, and I knew that I wanted to do something to address that problem.

Actually getting my own company off the ground was a struggle. Working in the service industry is always a hard choice; convincing customers that your services will benefit their lives is always hard, and forget about finding investment or government support for such an endeavour. No, if we were going to succeed, it would be through our own hard work and fighting for each and every customer. But that’s exactly what being an entrepreneur is all about.

AJ presenting on Chinese culture

We officially started our company in 2013, when we registered in Hong Kong, and started offering martial arts programmes to tourists from around the world. It took a few years to gain traction, but eventually, that started going well and the programmes were a success. Based on that, we decided to move on to the next step in our long term plan, and in 2017 opened a traditional Chinese culture centre in Beijing, offering private workshops and scheduled events in more than 20 different Chinese cultural subjects, mostly to tourists but also local expats as well. We did so well in fact that we maintained a five star review rating across all sites we were listed on and rose to number seven on TripAdvisor for cultural experiences in Beijing.

The fact that tourists were our main client base, almost proved to be our downfall. Relying on just that one demographic for our entire business, was one that we should have addressed early on. When problems first became apparent at the end of January, our initial take wasn’t to panic. China can handle it, it will be dealt with swiftly enough, we thought.

Why cross cultural training is essential to your business

We ignored the British government’s suggestions to leave China and posted comments online trying to balance the Western media’s coverage on China’s way of dealing with the situation. We thought we would just have to spend a few weeks relaxing and that things would soon return to normal. We were right about China’s handling of the situation but grossly underestimated the haphazard response from many Western countries and their lack of clarity and direction.

In China, those of us whose businesses are based on large gatherings, and especially tourists, are still at a disadvantage. Although the necessary steps were taken to return to near normality in just a few months, we could tell we wouldn’t be seeing the usual numbers during the summer months that we had during previous years. We knew that we would have to adapt to survive.

We weren’t alone in our troubles and wanted to work together in some way with other companies in a similar position to us. So we started reaching out to other companies reliant on tourists to see what we could do to help each other. We created some content featuring a handful of other companies discussing how they were handling the situation and the articles we produced were well received. This became a series which was shared on social media, keeping the featured companies in the minds of potential customers and reaching new audiences – not to mention providing some helpful cultural information about Beijing.

One of the classes laid on by Cultural Keys

We started to offer online presentations to continue to engage people in Chinese culture. These proved extremely popular and definitely helped us stay active and positive, with something to focus on during the early summer. We previously hadn’t considered an online offering before, but after seeing the demand both locally and internationally, we have decided this is something we will continue to offer long-term.

Because we have always kept our overheads low, we managed to survive on a reduced income. When we opened the culture centre two years ago, we made a decision to have no permanent staff or teachers, and this, coupled with very low rent, meant that we were able to get through the pandemic relatively unharmed. We lost a huge amount of business, through cancelled events in the spring, lost customers and B2B opportunities we were unable to capitalise on, but we did weather it.

We used the time we were given to look carefully at ourselves, our company, what we do and how we do it. And I think that has most definitely made us better and stronger, both in terms of the products we’ll offer moving forward and through working with others to build a community of like-minded businesses.

The post Entrepreneur Spotlight: Cultural Keys appeared first on Focus - China Britain Business Council.