Covid case numbers on the rise again, strict lockdown measures hit firms operating in China

China succeeded in slowing the spread of covid-19 in May with extremely strict lockdown measures started in March. Covid lockdowns were generally eased across the country last month. Last week, however, the number of covid cases was up again, most notably in Beijing. Lockdown-weary Shanghai, too, has seen a new spike in cases, with officials announcing last weekend that nearly all city residents must get tested for covid. Just as experts had warned, China’s zero-covid suppression strategy seems to be ineffectual against the highly contagious coronavirus omicron variant.

Tough measures to deal with the spread of covid have broadly affected the business community. China’s National Bureau of Statistics reports that the number of firms declaring losses in March was back up to levels not seen since the start of the pandemic in early 2020. The number of loss-making companies remained very high in April. The total amount of loss in the first four months of this year was slightly higher than in the same period in 2020. It appears that larger firms have been better at dealing with the situation than small firms. In particular, business has been reasonably good for raw material producers as raw material prices are now very high. In contrast, the situation for small and medium-sized enterprises (SMEs) is more concerning. A survey of Chinese SMEs conducted by Beijing University and the tech firm Ant Financial found that the profit margins of SMEs were just 1.6 % in the first quarter, a sharp decline from earlier. Nearly 40 % of small firms said that their cash flow was insufficient to get them through the next month, when the same share a year earlier was 30 %. Many large firms appear to be delaying their payments to subcontractors as a way to maintain their cash flow buffers. The Chinese government is also concerned of the situation, and it has tried to help SMEs by providing tax breaks and other forms of payment relief, as well as encouraging state-owned enterprises to speed up their payments and commercial banks to increase lending.

Covid restrictions have affected foreign firms operating in China. Surveys conducted in April and May by the American and EU Chambers of Commerce in China, as well as the Finland-China Business Association, all found similar sentiments among international firms operating in China. Covid lockdowns have hurt nearly all international firms. Many of them have faced production chain disruptions. They also generally anticipate lower net sales this year, reduced profitability and postponed fixed investments. Over 20 % of European firms reported that they were considering shifting their planned investments away from China to other countries due to China’s zero-covid policies. Nearly all respondent firms said they would like to see China replace its zero-covid policies with less draconian responses such as opportunities to spend mandatory quarantines at home, increased uptake of the leading international mRNA vaccines and higher vaccination rates. China’s restrictions on international travel have also affected the operations of foreign firms in China.