Joerg Wuttke, President of the EU Chamber of Commerce in China, is concerned about the state of the world’s second largest economy. The Zero Covid policy has led the country into a dead end.
Few Western observers know China better than Joerg Wuttke. The president of the EU Chamber of Commerce in China has been living in Beijing for more than thirty years. Today, Wuttke is concerned. The 25-million metropolis of Shanghai has been in lockdown for a month, and China’s economy is suffering an enormous slump. «The supply chains are so interlinked that lockdown measures in one place have ripple effects on other regions», he says.
Wuttke urges the government in Beijing to take an example from Singapore, where politics and society have learned to live with the coronavirus. Without success: «In current politics, the business people hardly get through anymore», says Wuttke in an in-depth conversation with The Market NZZ, which has been lightly redacted for clarity.
Mr. Wuttke, Shanghai has been in lockdown for a month. What's your assessment of the current economic situation in China?
The Omicron wave is like a game of whack-a-mole for China. First Xian was locked down, then Shenzhen, then Shanghai, and so on. Now we're all wondering what’s next. The case of Shanghai is bad. In its own image, it is the best and most advanced city in China; from Shanghai’s point of view, Beijing is province and Xian is a backwater. And then life in this metropolis grinds to a complete standstill. We in the international business community look to Europe and see how a somewhat normal life has returned, because people and governments have learned to live with the virus. Here in China, the authorities always fall back to square one.
The images from Shanghai are reminiscent of Wuhan more than two years ago. What are the implications for the economy?
The current lockdown is even more extreme than in early 2020, and the economy is crashing almost as hard. Just to give you a few numbers: Freight traffic volumes in the Shanghai metropolitan area plunged by 81% year-on-year in the first three weeks of April. Jiangsu province recorded a drop of 30%. Nationwide, freight volumes in April are down 15% year-on-year. There are currently no trains running between Nanjing and Shanghai; the authorities in Nanjing are so riddled with fear that they won’t allow any traffic. In Guangdong province, China’s economic powerhouse, freight volumes have plunged by 17%, even though there is no lockdown. Supply chains within China are so tightly knit that lockdown measures in one place have ripple effects on other regions.
The downturn accelerated in April?
Yes, big time. Remember, 2021 was a banner year for China's economy, especially in the manufacturing sector. January started at a high level, February and March were still okay. But from March 28th, with Covid in Shanghai, everything collapsed. The problem goes far beyond Shanghai: I hear of car manufacturers that produce in Jiangsu province and are not directly affected by the lockdown. But they can’t get parts from their hundreds of subcontractors, either because they can’t produce or because shipments can’t get through the lockdown areas. Everyone is desperately trying to fill their warehouses, the finely tuned just-in-time processes are no longer working. These effects will only be seen in the economic data over the next few months. GDP growth of 4.8% in the first quarter was probably already slightly managed upward, but the real shocker will come with the data for April.
The lockdown measures are a result of the zero-tolerance policy that China’s authorities are pursuing in the fight against Covid. Do you see any indication that this policy is being reconsidered?
No, nil. While 150,000 new cases per day is no longer a problem in Germany, 20,000 new cases in China are still considered 20,000 cases too many. For the past two years, the party leadership and government have spun the narrative that China has handled the pandemic much better than the decadent West. Now this narrative is blowing up in their faces. The population is genuinely afraid of the virus. Anyone who tests positive here is taken from home like a convict and forced into a camp with thousands of other people. Conditions there are sometimes deplorable, and it is often there that people fall really ill. I try to tell my contacts in the government that they could take an example from Singapore, where the government deals very pragmatically with the virus and society has learned to live with it.
Are you falling on deaf ears?
Officially? Totally. But in closed meetings – especially in ministries that deal with the economy and businesses – I meet very well-informed and open-minded top politicians. They know what Zero Covid means for the economy. It’s just that they can’t use this knowledge to bring about policy change at the moment. Until the 20th Party Congress, which will take place later this year, they will stick to the Zero Covid policy. President Xi wants to be confirmed for a third term, so he cannot change his narrative this close to the finish line. The president has maneuvered himself into two dead ends at once: He can’t change his Covid policy, and he can’t change anything about his friendship with Wladimir Putin.
How great is the anger among the population?
A cat-and-mouse game is going on in social media, censors almost can’t keep up with deleting everything. But it is very difficult to determine how the population really thinks, because the censors mercilessly clear everything. I can say, however, that people are genuinely afraid of the virus. The authorities do not inform that the Omicron variant is milder, they do not inform that other countries have learned to live with the virus. The authorities have spent a year bad-mouthing Western mRNA vaccines, with the result that people in China don’t trust the vaccination. That’s the problem: The political leadership can’t admit, so close to the Party Congress, that there is another way in dealing with Covid. They can’t admit that people in Europe can fly on vacation again and live largely a normal life. And they can’t admit that it would make sense to use mRNA vaccines in addition to the Chinese vaccines.
The economy is taking a big hit. To soften the blow, the government is trying to stimulate. Is it working?
The stimulus measures are like a band-aid for an amputation. The People's Bank of China pumps some liquidity into the system, money flows into infrastructure projects, state-owned enterprises receive support. But that doesn’t get private companies and foreign corporations to invest again. All over China, entrepreneurs look to Shanghai and have to deal with the scenario that the same thing could happen in their city. So, until further notice, they hit the pause button and freeze almost all investment plans. There’s no fiscal policy that can compensate for this restraint. Investment ambitions will not come back until there is confidence that the Covid policy will change.
So given the choice between pandemic control and the economy, the economy gets the short end of the stick?
Yes. The political signalling ist clear. The mayors, the regional politicians, they all have only one metric right now: Zero Covid. Imagine you're a mayor of a medium-sized city and a truck comes with supplies for a local factory with parts from the Shanghai area. Do you let the truck pass and run the risk that the driver will bring Omicron and you will have local contagions? You won’t get kicked out of your job if the economy in your area is doing poorly on average – but you will lose your job if you have Covid in your city. The system’s focus on Zero Covid leads to many decision makers being in a kind of self-destruction mode. They don’t care about the economy in the short term. In current politics, the business people hardly get through anymore. The fear is too great, and time and again you get confirmation from above: If you have Covid in your city, you have a problem.
Officially, the government expects 5.5% GDP growth this year. Is that still realistic?
No, growth will be below 4%, we don’t know how low. All signs indicate that the politicians do not want to solve the problem, but only to limit it. I don’t see any vaccination campaign, no information campaign, no imports of mRNA vaccines, and I don’t see the population being told that society can live with it. So I have to assume that Zero Covid will result in locking down this city and then that city on a monthly basis, at least until the Party Congress.
And that will mean continued production stoppages, clogged ports and strained supply chains?
Definitely. You see, Shanghai has the largest port in the world. It’s running quite well, it’s not in lockdown, but there are not enough trucks to clear the containers. There is an acute shortage of drivers, they all leave because they are tired of being tested over and over again. Now ships are clogging up the waters off Shanghai. Average waiting times for container ships there have tripled. Some are being diverted to Ningbo or Shenzhen, but those ports can’t replace the big port in Shanghai. In Europe, you haven’t even begun to see the effects of these problems. The ships coming into Europe today left Shanghai before the lockdown. Only in May and June will we see where the electronic equipment, the machine parts, the pharmaceutical precursors and components are missing. That will then lead to further shortages in the global supply chains. I am now hearing from more and more foreign companies that they are trying to move their supply chains to other countries. China is losing its credibility as the best sourcing location in the world.
So the shifts in supply chains are not just planning games, but are actually taking place?
Yes, many companies are restructuring their supply chains. For the first time, I see a number of companies looking to other Asian countries for their sourcing. That means their sourcing will be more expensive, because you can’t simply replace the extremely efficient Chinese cluster in many areas. But a more expensive sourcing is better than nothing. That’s also because China maintains an extremely rigid travel policy. As a CEO or as a purchasing manager, you can’t just fly quickly to Shanghai or to Guangzhou, but today you can easily get to Jakarta, Kuala Lumpur or Manila. With the current situation in China comes a huge loss of confidence, which will eventually lead to changes in supply chains. Foreign companies are not packing up and moving out of China, but they are considering moving parts of their investments to other countries. China has lost its nimbus as a base for sourcing and manufacturing, at least for the moment.
What are the particular implications of the war in Ukraine?
I keep noticing that members of the leadership in Beijing don’t even understand why the war and China’s proximity to Putin is such a stress for European companies. They don’t understand what Putin has triggered in European corporate headquarters. Nor do they understand that, from a Western perspective, there is a connection between Ukraine and Taiwan. That connection may not actually exist – I personally believe, for example, that the party leadership in Beijing probably realizes that an invasion of Taiwan could be much more difficult than they had thought. But the leaders in Beijing don’t realize that Western companies are grappling with the scenario that they would have to leave China – just as they are now leaving Russia – if China tried to forcibly integrate Taiwan. And it doesn’t help, of course, that China is adopting Russia’s aggressive rhetoric. The effect is the same as from the Covid policy: Foreign companies are hitting the pause button. New investments are suspended for the moment.
How is Beijing dealing with Western sanctions against Russia?
They are scrupulously careful not to break the sanctions. The banks are all complying for fear of being hit with secondary sanctions by the Americans. They all still have the Huawei shock in mind, when the best company in China was brought to its knees by Donald Trump in a matter of weeks and has not really recovered to this day. I know of some European banks that tried to sell their Russian client contacts to Chinese banks – but they were not interested.
The renminbi has depreciated quite significantly in recent days. Is that intentional?
No, I don’t think so. The devaluation is a reflection of the market and rising interest rates in the US. Capital is flowing out of China because China is looking worse and worse in the capital markets. That will continue. The renminbi will continue to weaken.
In mid-March, Vice Premier Liu He provided a brief wave of hope in financial markets with announcements of reforms. Has this effect already fizzled out?
It’s really tragic, but Liu He has de facto impaired his reputation. The best man for the economy in the government, with a huge international reputation, whom investors followed almost blindly for years – he no longer manages to implement important things in his own system.
Do you see any prospects at all for market-friendly reforms in China?
My experience in China is that when things get really bad, the technocrats come in, and they do make some reforms that are right. Perhaps there will be a rethink when the domestic economy hits rock bottom; perhaps they will realize in Beijing that they need foreign companies after all. Perhaps they will then open the doors wider again. But today, of course, we are not there yet. For now, China is not getting out of the corner the president has maneuvered the country into. They are prisoners of their own narrative. It’s rather tragic: China was the first to get into the pandemic, and it’s the last to get out. And in the meantime, they’ve been telling the whole world that they’re the best.