China’s zero-Covid catastrophe threatens Xi’s dream of becoming a new emperor

Economic activity was flattened. Businesses deemed essential could set up a “closed loop” under which workers could not meet anyone from outside their office or factory, sleeping on the premises to commit themselves wholly to an uninfected life of productivity.

Even they struggled to obtain supplies or ship products and risked infection when they did.

Goldman Sachs called China’s economy in April “exceedingly weak” with plunging housing construction and sales, stumbling lending and an almost 50pc drop in car production all indicating that GDP was flung into reverse in the second quarter by the latest lockdowns.

The investment bank expects that, even if Covid is now under control and Government stimulus plans work well, the economy will only grow by 4pc this year – well below Beijing’s 5.5pc target. After 2020, that would be the worst performance since 1990.

Analysts at Pantheon Macroeconomics expect the true rate of growth, as opposed to that reported via the opaque statistics of China’s state, to be in the region of 1.6pc this year. 

The one-party state’s efforts to clamber out of this economic hole tend to rely on more spending, ordering banks to lend more and directing regional governments to spend heavily on infrastructure.

Economist Iris Pang at ING is sceptical this will work, leaving the economy struggling to get back to its pre-omicron size.

“The central government targets a positive GDP growth in the second quarter, which should rely heavily on infrastructure investments,” she says. “Can local government achieve this? I doubt it.”

The challenge of Common Prosperity

The labour market is another potential source of pain. Unemployment across the country’s 31 largest cities rose to 6.7pc in April, up from 6pc in March, as lockdowns rippled through the economy and slowed activity – taking joblessness to the highest level since early 2020.

Joblessness among those aged 16 to 24 rose to 18.2pc, the highest figure ever recorded according to official figures. Xi’s recent crackdowns on tech and real estate – two key engines of growth for the Chinese economy – have led to sharp decreases in job openings across both sectors. Many young Chinese people work in e-commerce, which is booming globally but has drawn recent disapproval from Beijing.

In the West, such an economic backdrop could prompt unrest. In China, that appears functionally impossible because of the tight control the CCP has over the population. Yet the economic damage being dealt could have long-lasting consequences for Beijing.

“This is the group of people that should be supportive to mortgage or housing demand [in the future],” says ANZ’s Yeung. “If they don’t get enough for the downpayment on a future mortgage, there will be macro implications for the economy.”

With nearly 11m graduates poised to enter the jobs market this year, the pressure could soon grow more intense, tipping youth unemployment to 20pc or higher. There is a danger of further waves down the line: as the pandemic raged, the government pushed students to continue their studies rather than enter the world of work. 

Upon graduation they are sure to meet tough competition for roles, while many of the openings emerging are in blue-collar factory and retail jobs that hold little appeal for younger people. 

“People feel employment, people do not feel GDP,” adds Yeung. “The People’s Republic of China needs to think about what people are feeling.”

It’s a challenge for Xi, who has placed a push towards ‘Common Prosperity’ – policies that seek to narrow the country’s wealth gap – at the heart of his political programme.

Common Prosperity underpins recent Chinese moves against tech businesses and the Shanghai elites, for instance, which can be framed as part of an effort to direct the country’s staggering wealth creation towards the middle and lower classes. 

Xi appears convinced that the short term pain of such shifts is worth the longer term gains even as it causes whiplash for Western businesses and investors struggling to keep up with China’s blend of economics and politics.

Turning economic tide

After the first lockdowns, China and Xi benefitted, if anything, from the carnage engulfing the globe.

The Asian superpower seemed a leader in the recovery and offered apparently vital supplies to other nations, not least the personal protective equipment such as facemasks which were in short supply elsewhere.

Families across the rich world spent long months locked at home but were flush with cash from furlough schemes or government handouts, leaving them keen to buy toys for the kids, kit for home improvements or laptops to work from home. Much of that spare cash would have gone straight to China in its role as the ‘workshop of the world’.

Now, however, China’s own lockdowns serve to undermine that position in a threat not only to the country’s short-term recovery but its entire economic model.