Concerns for multinationals operating in China amid Beijing’s zero-Covid strategy continue to grow, as the biggest anti-government demonstrations the country has seen decades have sweep through the country’s major cities.

Emboldened by a fire in Ürümqi on Thursday November 24, which claimed ten lives, people have taken to the streets in Shanghai, Beijing, Chengdu and Wuhan to rail against Covid lockdowns. These have since morphed into defiant calls for more freedoms and some have even called for president Xi Jinping to step down.

“The sporadic protests pose less risk to multinationals than the lack of a roadmap out of Covid,” says Eric Zheng, president of the American Chamber of Commerce in Shanghai.

The sporadic protests pose less risk to multinationals than the lack of a roadmap out of Covid

Eric Zheng, president, American Chamber of Commerce in Shanghai.

Zero-Covid uncertainty

Mr Zheng stresses that Beijing’s anti-Covid measures have to change. “Despite Omicron being a very different variant, China continues to rely on its zero-Covid policy focusing on mass testing, tracing, centrally quarantining and lockdowns. While those measures worked well in the first two years, they are less effective now,” he adds.

“The continued uncertainty and disruptions are hurting businesses, investor confidence and the economy.”

This year, China suffered its worst first half-year for greenfield projects on record, according to fDi Markets, as it struggles to match its economic paradigm shift to steady foreign direct investment (FDI) inflows.

Taiwanese chip maker Foxconn came into the spotlight last week when workers at its plant in Zhengzhou in Henan province protested against their pay and working conditions. US tech giant Apple, which relies on supplies from Foxconn, is set to experience a shortfall of six million iPhone Pro handsets as a result of the ongoing uncertainty at the plant, Bloomberg reported on November 28. 

Max Zenglein, chief economist at Mercator Institute for China Studies, says that the volatility created by Beijing’s zero-Covid measures “adds a layer of economic risk” for foreign investment in China.

But, he adds, the case of Foxconn is less about China than it is a warning against the risks inherent in global value chains. “If anything, this highlights that if you’re dependent on one single supplier out of China or any other country, you need to rethink your strategy,” he says.

On November 23, the IMF said that the geopolitical tensions arising from Beijing’s zero-Covid policy “pose risks of fragmentation through financial decoupling pressures, and limits to trade, FDI and knowledge exchange around technology”.

As China moves into heightened volatility, its growth trajectory has become less predictable. Gross domestic product growth has slowed since its initial rebound during the pandemic. It now is projected to be at 3.2% for 2022, improving to 4.4% in 2023 and 2024, according to the IMF.

Vaccinations and restrictions lifting

The Chinese government has already responded to the clarion call that its zero-Covid strategy needs to be modified. On November 29, the National Health Commission held a press conference in which officials said they would speed up the vaccination programme for the elderly.

But some fear that lifting restrictions too soon would be calamitous for China and the world economy.

Jörg Wuttke, president of EU Chamber of Commerce, who previously told fDi that China’s “allure” as a foreign destination has been fading, says that if restrictions are lifted before herd immunity has been achieved, this “would put an enormous strain on [China’s] health system”.

In turn, this would then “likely lead to even more stringent virus controls being imposed, which would strangle supply chains, as witnessed throughout the second quarter of 2022”, he warns.

“The resulting impact on business operations, and the damage it would do to China’s economy, would be catastrophic,” Mr Wuttke says.