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China's Recent Handling of the Pandemic and Economic Growth Implications
Let’s begin by removing some common misconceptions about China, specifically about the image of the Communist Party. Chances are if you grew up in the U.S. or in a developed Western nation you were exposed to the narrative that the U.S.S.R. and China were centrally planned economies due to their totalitarian nature that emerged from each country’s Communist Party.
Here is a graph from Tim Urban’s Wait But Why post explaining the political structure and what terminologies such as “totalitarian” signify.
I want us to focus on the area in red, but also the area in white. The reason being is that every nation falls within these two quadrants (realistically speaking, you need some law and order). For example, I think it would be fair to say that China would fall in the red and the U.S. in the white, presenting us with the graph below:
Honestly, putting cultural norms aside, I believe the y-axis (Government Control) is the biggest factor driving the surge in global multipolarity which we have seen unfold since the pandemic began. But alas, I will save that discussion for another time.
Now, returning to the narrative and China, the totalitarian status still holds with its one-party system and a leader in charge for life. However, the misconception I was referring to earlier falls under centrally planned economies.
Professor Chenggang Xu explains this misconception beautifully well in this video interview where he describes China’s economic system as a “regionally decentralized totalitarian system.”
You can picture this through a hierarchical lens whereby the Chinese Communist Party (CCP) sets objectives for the nation which are contingent on the performance of individual provinces, and these provinces do the same for their respective cities.
Listed below is a graph showcasing the different Provincial GDP targets set by the CCP. You can also see how major cities such as Beijing and Shanghai fall as independent provinces with the same directive control.
And in conjunction, here is the breakdown of provincial GDP contribution as a percentage of China’s total GDP with Bloomberg providing color-coded risk assessments related to lockdown measures stemming from COVID-19.
Having lived in China, Hong Kong (pre-China taking it over), and Singapore, I’m not surprised how the ‘East’ has been able to organize itself to the point of setting growth objectives at regional levels. The U.S. has an undeniably greater sense of individualism vs collectivism as compared to the ‘East.’ And that is another factor influencing China’s response to the pandemic, collectivism. I view collectivism stemming from Confucian thought and his view of the family as a model for the state (I’m no expert in Chinese philosophy, so please correct me if I’m wrong). The term xiào, 孝, which refers to Filial Piety is made up of two characters, 耂 (“an old man with long hair, bent over”) and 子 (“a child”).
“and surely proper behavior towards parents and elder brothers is the trunk of goodness?”- Confucius
So now we have a regionally decentralized totalitarian system with a focus on collectivism.
As you might have heard, China has been experiencing waves of COVID-19 outbreaks across major GDP hubs such as Beijing, Hong Kong, Shanghai, and Shenzhen over 2022. This has led to a collective response like no other, and lockdown measures are being reinstated in Shanghai and Shenzhen which contributed over 7% of national GDP in 2020. Shanghai in particular began its lockdown on March 28, which was just three days after the latest Purchasing Managers' Index (PMI) levels were released, providing us a backdrop for further deteriorating conditions in April.
Shanghai is an ‘economic beast.’ Not only is it China’s financial and international trade center, but it is also the transport and logistics center of the Yangtze River Delta. With strict lockdowns being imposed (I say ‘strict,’ some say barbaric), other nearby provinces have set up roadblocks, enforced strict PCR testing requirements, and even imposed quarantines on truckers. Air traffic across China has also continued to take a severe hit, illustrating an even more pessimistic outlook than the beginning of the pandemic in early 2020.
The impact on shipping paints a similar picture, with lockdowns preventing the labor force’s ability to work. This is concerning to see happening in Shanghai which is responsible for 7% of Chinese exports. The graph below comes from a Freight Waves article and displays the average dwell time in days at the Port of Shanghai.
This all suggests the possibility of a contraction in China’s GDP growth at the beginning of Q2 with self-imposed lockdowns being a key driver as a consequence.
And who do you think gets the short end of the stick? The CCP or the provinces? The hierarchical lens tell all. Clearly the provinces get the short end, which is why I am not surprised we are hearing stories that provincial governments are bypassing State Council orders in an attempt to curb infection rates and follow through with the CCP’s “COVID Zero” objective at any costs, to avoid criticism from a lackluster COVID defense.
How long will this last? The lockdowns? The view of COVID-19 as a pandemic as opposed to an endemic? How far will the CCP push its “COVID Zero” narrative?
It’s hard to have an informed perspective when speaking of a foreign place where you are not physically present to see and experience, but I welcome any feedback and opinions on the matter.