Contrary to widely held hopes, Chinese officials are doubling down on zero-COVID policies
In the short term, firms in China will constantly face the threat of government measures that force them to change course on short notice and lead to higher operational costs. Staffing will remain an issue, as employees’ ability to commute and travel will continue to be determined by opaque and arbitrary isolation rules. This will be particularly damaging to businesses that rely heavily on in-person engagement where employees are required to be on site. (Look no further than Foxconn’s Zhengzhou plant).
Over the next few years, firms in China will continue to operate in an extremely uncertain business environment. Thus, where possible, MNCs should develop more nimble and agile organizational structures to cope with the heightened uncertainty. During this time, fewer foreign executives will be willing to relocate to China, causing a void in senior positions that have bridged the gap between China and HQs for years. MNCs should either prepare to pay expats in China more or accelerate training programs aimed at promoting local talent into senior positions.
The “good” news, if there is any, is that businesses are now in a better position to deal with disruptions simply because they now have more experience doing so. Executives should revisit their contingency plans and refine them based on recent experience. However, they should also prepare for damage to their long-term growth objectives. Repeated battles against COVID-induced uncertainties will further distract businesses from normal daily operations and force them to allocate more resources toward tackling emergencies.
- A few weeks after its 20th party congress, China’s top leadership body openly signaled that COVID-containment measures should be more “scientific and accurate.” This was broadly interpreted as a sign that China was finally planning to move away from zero-COVID.
- This signal was quickly followed by an official announcement relaxing several zero-COVID rules (e.g., the centralized quarantine was cut from seven to five days, secondary close contacts will no longer be monitored and isolated).
- The circuit-breaker mechanism for inbound flights was scrapped, with quarantine time for international visitors and the number of required PCR tests before boarding reduced as well.
- However, the announcement came as a number of large cities were battling a new wave of COVID outbreaks, including Guangzhou, Chongqing, Zhengzhou, and Beijing. Strict lockdowns, some Shanghai-style, have been imposed again in those cities.
- Lockdowns were so restrictive in Guangzhou that residents in some neighborhoods staged protests, with some seen tearing down COVID control barriers and clashing with riot police.
- Across the country, confusion about how to implement the new rules has been increasing, with inconsistencies between different provinces and cities causing massive inconvenience to domestic travelers. Many people have gotten stuck and been unable to return home.
High hopes for China’s quick reopening are misplaced, at least for now. The easing of zero-COVID rules only exists on paper. Behind the smokescreen of “relaxation,” local governments are actually tightening COVID-containment measures, from lockdowns and quarantines to mass testing and traveling. This is particularly true in some large and populous cities, such as Shanghai, Beijing, Guangzhou, Zhengzhou, Chengdu, and Shijiazhuang, where a large portion of China’s economic and business activities take place.
The writing is on the wall for those who are willing to see it. More factories will go into “closed-loop” mode, disrupting industrial production and jamming up transport and logistics. Consumption, already battered by a dark outlook, will be hit by another wave of pain as shops, restaurants, bars, KTVs, cinemas, and theme parks shut down again. Unemployment rates, especially among young people, will remain at heightened levels, further denting consumer confidence for the foreseeable future.
It’s a familiar script from the first half of this year. Prepare for déjà vu.
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