COVID-19 Measures in Shanghai: Thoughts on Policies Implemented and Consequences

Full lockdown in the fight against COVID-19 has ended in Shanghai. It is light at the end of the tunnel for Shanghai.

According to data from the National Health Commission, in the 24 hours of May 17, there were one imported case, 96 cases of local transmission (52 cases in Beijing; 49 cases in Sichuan) and 759 new asymptomatic cases. Considering the 3,000–5,000 new cases and more than 20,000 new asymptomatic cases reported daily in April, Shanghai residents are now nearing the end of the lockdown. It is understood that the Shanghai authority is starting to lift the lockdowns in some smaller community areas. Although most shops remain close and streets are still quiet, residents can now cautiously walk along the streets. After being locked down for nearly two months, this city can now look forward to its usual hustle and bustle.

Figure: Trend of new COVID-19 local transmissions in Shanghai

Source: Real-time COVID-19 big data report

Shanghai emerged from citywide lockdown by adhering to the general principle of dynamic zero-COVID, gaining control in preventing the spread of COVID-19.

Choosing the dynamic zero-COVID approach was an unavoidable choice that protects Shanghai while also fulfilling the “people first, life first” tenet. On the verge of success in controlling and preventing the outbreak, it is crucial to have some idea of how the city and economy will recover, particularly by assessing the effects of the lockdowns on the economy. This is beneficial for a rational understanding of the cost and benefit of the public policy of prevention and control.

There are varied estimations of the economic cost of Shanghai lockdowns. For instance, based on the 2021 GDP, the city is estimated to have incurred a daily GDP loss of RMB 11.8 billion which translates to a monthly GDP loss of RMB 360 billion. Meanwhile, estimation based on cost and expenses shows that the expenses and losses incurred rose to RMB 0.9 billion daily and RMB 27.7 billion monthly. The calculation covers the spending on conducting RTK tests, the cost of developing vaccines, expenses of constructing patient shelters and tax losses.

The brief calculations mentioned above can hardly reflect the economic cost resulting from the aftereffects of the Shanghai lockdowns. In fact, the actual nationwide economic consequences of Shanghai lockdowns are far greater than what has been estimated for the city and what has been estimated within the country. The lockdowns have certainly impacted foreign investment. Premised on the continued existence of the Chinese market and supply chain, it is generally believed within the country that even if some foreign investors withdraw from China, these investors will still return to China once Shanghai resumes normalcy. This belief is probably too optimistic. A case in point are the situations related below.

The European Union Chamber of Commerce in China (EUCCC) has cautioned that in the future, European enterprises might withdraw from China in droves. This is against the backdrop where a plan has been put in place by the Shanghai authority to lift the lockdowns that have lasted more than six weeks so far. Many representatives of chambers of commerce maintain that even if the lockdowns are lifted next month, China still faces many uncertainties emanating from travel restrictions imposed on its citizens and risks of further COVID-19 outbreaks.

On the Chinese State Immigration Administration’s announced plan to strictly limit unnecessary overseas travel by Chinese citizens — to significantly reduce the risk of new outbreaks — Jorg Wuttke, the chairperson of the EUCCC, spoke about the shock expressed by foreign enterprises. He stressed that while these enterprises have been making efforts to localize their management in China, their managerial personnel are now unable to travel to their corporate headquarters. Bettina Schoen-Behanzin, the deputy chairperson of EUCCC, has expressed similar concerns. As policy governing Shanghai lockdowns continues to be volatile, she says business confidence has been hit hard, with many companies and individuals seriously pondering over their continued presence in China.

Concerns have also been expressed by the American Chamber of Commerce in China (AmCham-China). Michael Hart, president of AmCham-China, stated on May 17 that China may see a decline in foreign investment in the next three to five years after evaluating the lockdowns and various restrictions imposed in China this year and the previous two years. According to Hart, although this does not mean that U.S. capital and enterprises will immediately move out of China, many companies currently relying on Chinese supplies have consulted the chamber of commerce on alternative suppliers and on whether it is advisable to relocate their production facilities and supply sources. In an earlier survey conducted by AmCham-China, 52% of the 121 participating companies acknowledged that they were in the process of cutting back on investment or postponing investment plans in China. These companies are concerned about the domino effect of prolonged lockdowns: closed, congested seaports and roads, prolonged production shutdown, and the eventual massive decrease in income. Only 1% of the participating companies indicated their commitment to continue raising investment. The other 44% of the companies maintained their wait-and-see stance. AmCham-China, according to Hart, is extremely concerned about the effects of travel restrictions on the U.S. and other foreign investments in China.

As related by Microchip CEO Ganesh Moorthy during a recent media interview, some of Microchip’s major suppliers are based in the Shanghai region; and this round of COVID-19 restrictions has worsened the pre-existing tight semiconductor supply chain, posing challenges to the company’s product delivery. Further, according to Moorthy, although some partner factories have already resumed operations, the resumption of production capacity under a closed-loop management process is not optimistic. The resulting impact on the supply side will further push up prices of semiconductor products in the short term. Moorthy is hopeful about the gradual lifting of the lockdowns in the coming one to two weeks. He stated that Microchip is currently taking a “wait and see” attitude toward the company’s supply chain. If there are more lockdowns, he says Microchip will implement longer-term adjustment measures through specific means.

Based on the sentiments and circumstances mentioned above, it is clear that Shanghai, as China’s most internationalized city, serves as a link between China and the rest of the world, with distinct functions and influence. If the lockdowns had occurred in some inner-city areas of China without such a status, the events surrounding the lockdowns would have likely received little attention from the outside world, and the effects of the lockdowns would not have been as severe. For a city like Shanghai, the effects of the lockdowns are of international implications. In the past, foreign investors had expectations about the Chinese market; but post-lockdown, they witness happenings and uncertainties never imagined before about this market. Their perceptions of the Chinese market may thus shift, adding to their existing concerns about deglobalization and geopolitical pressures on the Chinese market. Overall, the views and concerns of the EUCCC and AmCham-China reflect the concerns of a significant number of foreign investors that Shanghai and the Chinese market may undergo significant changes.

Implementing public policy for pandemic prevention and control comes at a cost, just like any other measure. China’s approach to epidemic prevention and control is based on real-world situations, and the cost of going this route is understandable. Nevertheless, it should be noted that for a large, internationalized city like Shanghai, the economic cost of city-wide lockdowns is immensely high. Far beyond impacting the economy of Shanghai, these lockdowns may cause an unendurable strain on China’s national economy. This line of consideration and conclusion is imperative in formulating future policies. As asserted by the central government, in prevention and control, the essential is to trade the smallest price with the biggest benefit. Hence, in facing the complex COVID-19 situations this year and in future, the approach is to give equal attention and emphasis to “prevention and control”, “economic stability” and “secure development”. To achieve this comprehensive outcome — and to realize the “people first; life first” tenet — it is imperative to prioritize science, constantly raising the standards of both science-based decisions and scientific control and prevention measures.

For cities affected by COVID-19 circumstances, the post-pandemic economic recovery requires long-term preparatory measures. In effect, “thinking long-term” is the key to economic recovery and comprehensive recovery of a city.

Final analysis conclusion:

The implications of lockdowns on Shanghai, China’s most internationalized city, are far-reaching in that not only the city but also the overall economy of China is affected.

Writer by He Jun
Partner, Director of China Macro-Economic Research Team and Senior Researcher. His research field covers China’s macro-economy, energy industry and public policy.

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