The Hidden Costs behind China’s “Zero COVID Policy”

Ever since the COVID-19 outbreak in Wuhan, China has consistently pursued the Zero COVID Policy, which aims for zero new infection cases by suppressing occasional regional breakouts. While China's Zero COVID Policy has proven to be highly successful and has enjoyed tremendous popular support for well over a year since the outbreak, the recent emergence of the delta and omicron variant has shifted the balance between the costs and the benefits of this policy. That is to say, as the dominant variant became milder yet more transmissive, the benefits of maintaining the policy became lower while the cost of it surged. With the recent lockdown of Shanghai, many started to question the price of this policy, expressing their objections and discontent on social media. Indeed, the Golden Age of Zero COVID Policy has become history. With the omicron variant taking over, most countries have stopped pursuing this policy. China, alongside with North Korea, where breakthroughs were also recently observed [1], were the last two countries seeking this policy.

The toolkit of Zero COVID Policy mainly involves public health measures including mass testing, border quarantine, and regional lockdowns, all of which require high and continual fiscal inputs. Large-scale and strict lockdown measures, in which more than 27 cities and 180 million people are currently under [2], have also put the regional economy, and even the countrywide and global economy, to a greater extent, through an immediate shock. While these more "obvious" fiscal and economic costs are often cyclical and self-limiting, much like COVID infection itself, the more persistent and impactful are the long-term "hidden" costs on varying aspects of the country, from education to resident outflow, which would eventually hamper China's long-term productivity and economic growth.

Foreign investors' dilemma

As observed by the previous lockdowns in Wuhan, Xi'an, Shenzhen, and recently in Shanghai, the enforcement of lockdown measures has posed a very evident and immediate effect on the economy, but what happens next to the economy? One would presume, and could actually observe from the past economic data, that there would be a smooth and steady return to the pre-lockdown economic activity level and growth trend, as if nothing has happened. That, of course, is the ideal circumstance, and could perhaps continue forever if China were a closed economy. But with the disclosure of recent economic data and analysis, it appears that such a scenario may become history, due to the effects of outside forces.

Since China joined WTO in 2001, Foreign Direct Investment (FDI) has played a significant factor in accelerating China's economic growth. For years, China has been viewed by foreign investors as the ideal FDI destination because of its relative political and economic stability, and the presence of an almost perfect supply chain. In fact, China's inbound FDI reached $334 billion in 2021 [3], the largest FDI recipient worldwide, thanks to a relatively stable domestic economic and COVID situation compared to economic downturns in almost everywhere else in the world. The record-breaking influx of FDI to China has promoted even higher economic growth, allowing it to become one of the best-performing economies in 2021. However, as major cities like Shanghai and Beijing, where most FDI went to, entered large-scale lockdowns and disrupted the nationwide supply chains in 2022, foreign investors are starting to reexamine their investment choices.

According to a nationwide survey by the EU Chamber of Commerce in May, 23% of their members were considering shifting investments out of China, the highest level on record. More so, 77% report that China's attractiveness as a future investment destination has decreased [4]. Similar pessimism was shared by their US counterparts, whose chair of the Chamber of Commerce, Michael Hart, warns of a "massive decline in investment two, three, four years from now." [5] Apple is also reportedly telling some of its manufacturing contractors that it wants to increase production outside of China, pointing to COVID lockdowns as one reason for the shift [6]. A tally of new factories and other plans announced by foreign companies showed the lowest quarterly total in the first quarter of 2022 since records began in 2003 [7].

With the vast majority of countries relaxing COVID controls, China's Zero COVID policy meant that firms have to endure the possibility of occasional, and even in some cases, cyclical, shutdowns and disruptions, bearing extra costs and posing a significant risk for all firms in China. As China's Zero Covid Policy is likely to persist in the future, investors are also expected to find substitutes for their Chinese investments.

While China does currently enjoy a complex, and, one could perhaps argue, the world's most close-to-perfect supply chain system, given a long enough time, this chain is not irreplaceable. Emerging economies like Vietnam have already taken in many outflow industries from China (the most significant of which is perhaps the textile industry), and are planning to do so in the future, especially as this "ideal" supply chain is under frequent shocks. As a result, there exists a dilemma in front of foreign investors: Do they continue to invest in China, where there is a complex and interconnected supply chain that may be subject to frequent disruptions, or do they invest in other countries, and start everything from scratch?

A new exodus?

If you follow the news closely enough, you should not be unfamiliar with the numerous direct social impacts of lockdowns. Take the recent Shanghai lockdown, for example, the disorganization of the local governments in conducting testing, distributing food (and in some cases, not distributing food at all), and transporting positive patients, or even just the mental and physical burden of enduring lockdown itself, have pushed the residents to the brink, inciting waves of uproars on social medias [8]. Especially as the omicron variant, which is commonly believed to cause milder symptoms, takes over the lead, dissents of the Zero COVID Policy have become more and more prevalent on the Internet.

While it is obvious that frequent lockdowns and the high economic costs have led to discontent from many, impairing the relationship between the government and the people, which has been overwhelmingly (and perhaps surprisingly to many) positive in the past [9], the more hidden social impact may be the outflow of wealth and talent, caused by a foreseeable, and perhaps ongoing, exodus of foreigners and wealthy people.

In terms of foreigners, while the border quarantine and the limits on international flight numbers have already added considerable additional costs to their movements between China and their home countries, the recent series of lockdowns have resulted also in a series of new inconveniences, that are most likely absent in almost everywhere else in the world. Since the  COVID outbreak in 2010 and the subsequent imposition of entry restrictions, there has been a steady drain of foreigners in China [10]. Especially after the lockdown in Shanghai, the base for many multinational firms, this trend is projected to become even more severe in the foreseeable future.

A survey by the German Chamber of Commerce in early 2022, for example, found that nearly 30% of foreign employees had plans to leave China [11]. In April, an American Chamber of Commerce survey found that 44.3% of respondents said they would lose expatriate staff if the current COVID restrictions remain in place for the next year [12]. With this continual outflow of expatriates, China is losing more than the labor itself – foreigners bring consumption, investments, and, most importantly, talents to China. As China continues to implement the Made in China 2025 vision and other plans to boost industrial transformation and technological innovations, the free flow of talent and ideas is more important than ever. With these limitations and drainages in foreign skills, however, it is likely that the long-term economic productivity of China would be hampered, and these visions would face even more obstacles on top of the current complex global situation.

What about the next generations?

During the global pandemic, online classes on platforms like Zoom quickly replaced traditional education modalities in an effort to curb COVID infection among students, and lockdowns prevented young children s opportunities to connect with peers. As much of the world gradually relaxed social distancing measures and brought classes back to the classroom, Zero COVID Policy meant that students would have to endure almost periodical rigorous social distancing measures and online classes once locally-transmissive cases were found in their area. Some students may argue that Zoom class is a great invention because it allows for easier access to courses, but recent scientific discoveries tell us a different story about the impact of lockdowns and zoom classes.

Numerous scientific researches and surveys have warned us about the downsides of regional lockdowns on children, including the short-term impact on student grades and learning, and the more severe long-term effects on cognitive and intellectual development. In a survey of teachers conducted by McKinsey & Co, which also includes teachers from China, teachers from all investigated countries reported a significant decline in teaching quality following the transition to online classes during the pandemic [13]. Furthermore, more scientifically rigorous investigations found that children born during the pandemic have significantly reduced verbal, motor, and overall cognitive performance compared to children born pre-pandemic [14]. Researches also show that children below the age of five, whose cognitive function is quickly developing, are significantly impacted by the lockdowns because of a lack of interpersonal connections between peers. This would perhaps result in exceptionally severe consequences in China, due to the typical one-child setting of Chinese families. In their study on the neuropsychological impacts of e-learning, Jha et al. concluded that a transition from classroom learning to online classes had impaired children's attentional capacities, memory processes, and social cognition abilities [15].

While the impact of lockdowns on children may not be fully present in the near future, the long-term consequences of degraded teaching quality and impairment in children's neuropsychological abilities could severely impact the Chinese long-term labor productivity, eventually hampering China's long term economic growth.

What's next for China?

On May 5th, Chinese President Xi Jinping emphasized in a meeting of top leaders that China would stick to its dynamic Zero COVID Policy, pointing out that "people's health is the party's top priority." [16] Indeed, China's Zero COVID Policy has enjoyed a rather significant support and success in the past. Recent research has also shown that Zero COVID Policy in China has prevented more than 1.6 million excess death tolls in China [17], a significant number compared to the death tolls all over the world.

As such, this article is in no way an attack on the Zero COVID Policy, but rather an analysis of its possible yet largely hidden consequences, which have not gained sufficient exposure and attention. As the omicron variant emerged and the virus became milder, it is perhaps a good time to rethink (but not necessarily abolish at once) the Zero COVID Policy. For example, a possible solution would be to gradually increase COVID booster vaccination coverage in China, allocate more funding to COVID remedy research, and gradually ease social distancing measures to find a relative balance and dissolve the possible hidden costs at their cribs. After all, it is the unknown and the hidden that are the scariest, because of the uncertainties that they would bring to our collective future.

References:

[1] Kuhn, A. (2022, May 27). North Korea says its COVID outbreak is now under control. but is it? NPR. Retrieved May 30, 2022, from https://www.npr.org/sections/goatsandsoda/2022/05/27/1101534652/north-korea-says-its-COVID-outbreak-is-now-under-control-but-is-it

[2] Yeung, J. (2022, April 29). 180 million people impacted by China's COVID lockdowns. here's what you need to know. CNN. Retrieved May 30, 2022, from https://www.cnn.com/2022/04/28/china/china-COVID-lockdown-explainer-intl-hnk/index.html

[3] Huang, T. (2022, March 30). Foreign corporates investing in China surged in 2021. PIIE. Retrieved May 30, 2022, from https://www.piie.com/blogs/realtime-economic-issues-watch/foreign-corporates-investing-china-surged-2021#:~:text=Most%20noticeably%20the%20ability%20of,to%20%2423.5%20billion%20in%202021.

[4, 5, 7,11] Kynge, J. (2022, May 20). Pessimism engulfs the Chinese economy as foreign investment fades. Financial Times. Retrieved May 30, 2022, from https://www.ft.com/content/7aa91a31-d034-4b9d-9305-fa6b60935a73

[7] Moyer, E. (2022, May 21). Apple wants to increase production outside of China, report says. CNET. Retrieved May 30, 2022, from https://www.cnet.com/news/apple-wants-to-increase-production-outside-of-china-report-says/

[8] Campbell, C. (2022, May 11). Shanghai's covid-19 lockdown pushes residents to the Brink. Time. Retrieved May 31, 2022, from https://time.com/6175179/shanghai-covid-lockdown-residents/

[9] Harsha, D. (2020, July 9). Long-term survey reveals Chinese government satisfaction. Harvard Gazette. Retrieved May 31, 2022, from https://news.harvard.edu/gazette/story/2020/07/long-term-survey-reveals-chinese-government-satisfaction/

[10, 12] Yu, X. (2022, April 28). Expats flee as Shanghai's Covid Lockdown drags. Reuters. Retrieved May 31, 2022, from https://www.reuters.com/world/china/expats-flee-shanghais-covid-lockdown-drags-2022-04-28/

[13] Sean, F. (2021, May 9). Kids learn better in class than when studying from home, finds teacher survey. World Economic Forum. Retrieved May 31, 2022, from https://www.weforum.org/agenda/2021/03/classroom-teaching-better-than-remote-learning-education/

[14] Deoni, S. C. L., Beauchemin, J., Volpe, A., & D’Sa, V. (2021). Impact of the COVID-19 pandemic on early child cognitive development: Initial findings in a longitudinal observational study of Child Health. https://doi.org/10.1101/2021.08.10.21261846

[15] Jha, A. K., & Arora, A. (2021). The neuropsychological impact of e-learning on children. Asian Journal of Psychiatry, 54. https://doi.org/10.1016/j.ajp.2020.102306

[16] Cheng, E. (2022, May 6). China's XI urges officials to 'resolutely fight' those who question zero-covid policy. CNBC. Retrieved May 31, 2022, from https://www.cnbc.com/2022/05/06/chinas-xi-jinping-calls-for-sticking-to-zero-covid-policy.html

[17] Davidson, H. (2022, May 11). Lifting Zero-COVID policies in China could risk 1.6m deaths, says study. The Guardian. Retrieved May 31, 2022, from https://www.theguardian.com/world/2022/may/11/lifting-zero-covid-policies-in-china-could-risk-16m-deaths-says-study