The normalization of strict COVID containment measures will add extra costs to MNCs’ day-to-day operations
The rescue package announced by Li Keqiang should help stabilize China’s economy and alleviate some of the pain businesses have experienced in the past few months. Additional infrastructure building should help create new opportunities for sectors related to construction, materials, equipment, and engineering, and the jobs these projects create should help support consumption, at least for a while. Tax cuts on car purchases should, in theory, support car sales. Overall, B2B MNCs should explore opportunities that come with this part of the stimulus package.
However, the measures fall short of what businesses really need now. The normalization of strict COVID containment measures, such as frequent testing (e.g., in some cities, the entire population is required to take a test every 72 hours) and the requirement to produce various “health codes” to enter public venues (including shopping malls and factories), means people can suddenly get stranded, leading to longer commuting trips for workers and more chaotic logistics for manufacturers. Even in “closed-loop” facilities, it takes only one positive case to disrupt the entire operation. These issues will continue to pose challenges for MNCs’ daily operations. MNCs should build contingency plans to cope with unexpected disruptions like these (e.g., plans to establish hybrid work across the whole organization) or, for firms with industrial production facilities, build more flexibility into and allow more leeway throughout their supply chains.
In addition, at a time when many firms are resuming production and operations, talent pools in major cities are shrinking because months of lockdowns have driven out many employees—blue collar and white collar, Chinese and expats. A good number have gone home and won’t return anytime soon. This will lead to a shortage of employees for all businesses, which will push up the cost of recruitment and retention. (These bills will come on top of all the additional costs MNCs will have to bear to comply with the zero-COVID rules.) Firms should start the process now to retain key staff members and prepare for a soon-to-come higher employee turnover rate.
In short, while the premier would like his stimulus package to be seen as vital, forceful, and timely in the battle to rescue the economy, it will take a lot more for firms to regain their confidence and go “all-in” on China again.
Realizing that the economy is in serious trouble, the government is utilizing a multi-pronged approach to combat slowing growth. However, most of its measures still focus on the supply side of the economy and fail to address the root of the current problem: weak demand, caused by stiff lockdowns imposed across many of China’s largest and most populous cities, where people are facing job losses and declining incomes.
There is also one key issue that Premier Li was unable to touch—the zero-COVID policy. With this approach still in place, any reopening, like the one we are seeing in Shanghai now, faces the risk of being reversed should there be an uptick of infections again. With the zero-COVID strategy here to stay, business operations are not going to return to pre-lockdown conditions for the foreseeable future. In the next few months, we are likely to see cycles of lockdown and reopening across multiple major cities (though full-city Shanghai-style lockdowns have become less likely). In short, it’s difficult to see how China can revitalize its economy while hewing to its flagship strategy.
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