Under the huge glass roof of the Indigo shopping center, which deploys its futuristic forms to the north of the Chinese capital, all the major brands are present, but not the customers. “People are afraid of the virus or have left Beijing for the Lunar New Year holidays, laments a clothing saleswoman. And then, we feel that consumers are paying attention to their expenses. We do not sell much while normally, at this time, our turnover is much better.”
Chinese growth may have jumped 8.1% in 2021, a peak since 2012, but the atmosphere is not festive. Because this spectacular performance hides less reassuring tendencies. GDP growth steadily lost momentum last year, falling from 18.3% in the first quarter to 4% in the last. The fall should continue at the start of the year, under the effect of a serious real estate crisis and the sharp slowdown in household demand (+1.7% in December for retail sales compared to the same period in 2020).
In question, the national “zero Covid” strategy: at the slightest positive test, the authorities do not hesitate to confine entire cities such as in Xi’an (13 million inhabitants) and Yuzhou (1.1 million), or several neighborhoods (in Zhengzhou, Tianjin, etc.) The arrival of the Omicron variant only increases the pressure, as the Beijing Olympics approach. “We are entering a very delicate period, until the XX Congress of the Communist Party in November [qui devrait voir le président Xi Jinping obtenir un troisième mandat historique]. The government will do everything to prevent contamination. And other cities will be confined, which will weigh even more on consumption”, anticipates Carlos Casanova, Asia economist of the bank UBP, in Hong Kong..
The city of Xi’an, with deserted roads, on December 28, in full confinement (Photo by Tao Ming / XINHUA / Xinhua via AFP)
Tao Ming/Xinhua/AFP
Small businesses have suffered
These restrictions, which are therefore likely to last, create their share of social damage. At the Beijing West station, Li, a cook, arrives from his province of Shaanxi, a bundle on his shoulder. “There, because of the epidemic, we had almost no customers at the restaurant where I worked. As it closed, I came to Beijing to look for work.” “Small businesses or service companies, which represent the vast majority of jobs in urban areas, have been the most affected by this type of measure”, underlines Thomas Gatley, analyst at Gavekal Dragonomics, in Beijing. In total, at least 4.4 million SMEs went out of business in 2021, according to the South China Morning Post.
“Officially, unemployment barely exceeds 5%. But most of the unemployed are not counted in the statistics: they are migrant workers”, recalls Michael Pettis, professor of finance at Peking University. Many of these provincial emigrants in the big cities have lost their jobs on construction sites, due to the collapse of real estate investments. This over-indebted sector – like the giant Evergrande, on the verge of bankruptcy – is subject to severe discipline by the authorities.
Haro on the giants of high tech
He is not the only one. New technologies and private education have also been brought into line. The district of Zhongguancun, in the north of Beijing, has long been nicknamed the “Chinese Silicon Valley”. Today it looks like a ghost zone. New Oriental Education & Technology, which was one of its flagships, had to lay off 60,000 teachers last year, after the Communist Party’s decision to ban private lessons, sources, according to him, of inequalities. “We don’t get any unemployment benefit, sighs Lin-Yao, a young English teacher. And finding work is really difficult.” In total, 3 million people could lose their jobs in education; and several tens of thousands more in Internet companies. iQiyi, the Chinese Netflix, is laying off 20 to 30% of its employees. ByteDance (TikTok), Alibaba (the e-commerce giant) or Didi (the Chinese Uber) are also reducing the sails.
This uncertain climate discourages investment. And the financial difficulties of local governments further cloud the picture. “They can no longer sell land to real estate groups, whose debts they have to pay off, and are called upon to manage the health crisis”, notes Alicia Garcia Herrero, chief Asia Pacific economist at Natixis, in Hong Kong. Health authorities require cities to be able to test all their inhabitants in two or three days in the event of an alert. This year, civil servants are even deprived of their New Year’s bonus, and some salaries are reduced by 25 to 30%. On social networks, the director of a Shanghai police station even complained of seeing his annual salary reduced from 48,900 to 28,000 euros, according to a Hong Kong newspaper.
The specter of supply disruptions
The obsession with “zero Covid” at all costs has also cut the country off from the rest of the world. The activity of several ports (Ningbo, Dalian, Tianjin or Shenzhen) suffered interruptions, causing huge traffic jams off Shanghai and Canton. “There are very few containers available from China and when we find some, they are at 16,000 dollars each to France, against 8,000 last year and 2,500 before the Covid, testifies the French Mario Chevalier, boss of E&B Trading. And it takes three months to deliver to the port of Le Havre.”
Seen from the West, the Chinese health strategy is starting to give manufacturers cold sweats. All the bosses have in mind the cascading supply disruptions during the first confinement, in the winter of 2020. If the large groups have become aware of their extreme vulnerability in the face of multiple and sometimes opaque chains of subcontractors, they are very far from solving the problem. Textiles, toys, shoes, electronics, semi-conductors, electrical equipment, semi-finished products, active ingredients for the pharmaceutical industry… Dependence on the factory of the world remains complete.
In the crisis cells of car manufacturers, the deliveries of electronic chips are watched like milk on the fire. Factories have been operating in fits and starts for months, depending on deliveries. “The fear of an Omicron wave in China could lead to an anticipated overconsumption of certain components, generating extreme tensions”, fears Frank Marotte, CEO of Toyota France. The Japanese manufacturer, whose Tianjin factory is shut down after the detection of a handful of infections, has already announced the color: it will have to reduce its global production plan by almost 18% in February. “Omicron has the potential to significantly change the situation in China compared to 2020 or 2021,” warned Airbus CEO Guillaume Faury. At Safran, we are counting the days since a major supplier of turbine parts for aircraft engines has been shut down in Xi’an. These “stop and go” could well put a brake on the economic recovery underway in Europe and the United States…
Faced with the Omicron risk, the bank Goldman Sachs revised its Chinese growth forecast for this year downwards to 4.3%. To correct the situation, Beijing should resort to the good old methods, by relaunching infrastructure investments. “But the government will do nothing that could call into question its zero Covid strategy, warns a Western diplomat. It is a matter of national pride.” Even if it means sacrificing whole sections of its economy for political reasons.