China’s zero-Covid has shaken confidence in provide chains

While Chinese authorities could gradually ease restrictions in March, the zero-Covid policy is weakening global confidence in the country’s industrial supply chains, said Li Daokui, Mansfield Freeman Professor of Economics at China’s Tsinghua University.

In the short term, supply chains will remain largely unaffected as factories continue to operate even when consumption is lower due to lockdowns, Li, a former adviser to the People’s Bank of China, said in an in-depth interview with Squawk Box Asia CNBC Wednesday.

“However, the long-term effects may already be formed, which means the international economic community is thinking twice about the stability of China’s supply chains,” he said.

“People used to think that China was the most solid, safest and most stable source of supply. Now they are thinking about rebuilding their own supply chains in their own countries or regions. So this is the situation now.”

Protests erupted across China over the weekend in a rare display of frustration at China’s zero-Covid policy and the ongoing lockdowns. There were also student protests at Li’s Institution, Beijing’s elite Tsinghua University.

The unrest came as infections rose, prompting more local Covid controls, despite a change in central government policy earlier this month that had sparked hopes of a gradual easing.

Rare protests erupted across China over the weekend as people vented their frustration at China’s zero-Covid policy and the ongoing lockdowns.

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Nearly three years of controls have battered the economy, with many economists forecasting GDP growth of less than 3% for China, well below previous years of between 6% and 8% annual growth.

However, the number of infections started falling earlier this week as Beijing pushed for more vaccinations for the elderly, which is key to reopening. Opening up is high on Beijing’s agenda, Li said.

“Well, I think the authorities are considering it… and I’m guessing that by the end of March [at] At the latest, the policy will change very well and fundamentally … that is, focus on protecting the elderly while opening up to the rest of the population,” Li said.

While Beijing may consider importing and using Western mRNA vaccines, which have a higher efficacy rate, Li said Chinese authorities are more likely to use other controls, such as ring-fencing lockdowns.

China has reached a tipping point with its Covid zero policy and Beijing will have to change tactics.

“People complain about things but the only thing people think about is the zero Covid policy. And people in all walks of life seethe with dissatisfaction with the continuation of this policy,” Li said.

“An important and philosophical reason is that the zero Covid policy was designed to fight [the] Virus, that was three years ago, but now the virus has changed.

“In a war [if] Your enemy has changed, you must change your tactics.”

“So I’m optimistic that the zero-Covid policy will see a big, substantive, gradual, pragmatic change. Once that changes, many of the problems you mentioned, economic problems, problems with people’s emotions… will gradually or completely be alleviated.”

If China abandons its Covid-zero policy, Li says the country should be able to return to a “magic” growth rate of 5% to 6%, which is the right level of growth given the current size of China’s labor market.

Demonstrators hold up a white sheet of paper against censorship as they march during a protest against China’s COVID-zero measures November 27, 2022 in Beijing.

Kevin Frayer | News from Getty Images | Getty Images

But simply opening up isn’t enough, as Beijing also needs to deal with its struggling real estate sector and help indebted local governments refinance, Li said.

As a first step, however, China can quickly boost its economy through infrastructure projects and investments.

“Well, in the short term, in the very short term… infrastructure investments are still the most important driver for stabilizing the economy,” Li said, adding that there are many ready-made projects that are about to start that can provide the economy an instant boost.