Protests in multiple cities in China over the country’s so-called zero-COVID policy rattled world markets Monday, adding to fears about stagnating growth and supply chain crunches as the holiday shopping season picks up.
The S&P 500 index of major U.S. stocks fell three-quarters of a percent, dipping below 4,000 during Monday’s morning trading session. The Dow Jones Industrial Average lost more than 180 points, falling below 43,160.
Hong Kong’s benchmark Hang Seng index fell off a cliff Monday morning, losing more than 3 percent of its value before climbing back to finish 1.5 percent lower than Friday’s close. China’s Shanghai Composite index finished down more than three-quarters of a percent, while the German blue chip DAX index shed nearly 1 percent of its value in Monday morning trading.
Shares of U.S. electronics giant Apple were hit particularly hard by news of the protests, falling more than 2 percent on concerns that zero-COVID policies could affect iPhone production at key plants across the country.
Protests erupted across China after 10 people died in a fire last week in Urumqi, a city in the western part of the country that has seen extended lockdowns, with some residents confined to their homes for more than three months.
Demonstrations spread to multiple cities including Shanghai, Nanjing and Beijing, where students rallied on the campus of Tsinghua University. Crowds in Shanghai even called for Xi Jinping, the head of the Chinese Communist Party, to step down, according to video circulated on social media.
Economists say China’s position as both a leading global manufacturer and as an important market for many U.S. businesses means that its COVID-19 policies have far-reaching economic implications.
“Big American companies in general earn a lot of profits in China,” David Dollar, a senior fellow in U.S.-China economic relations at the Brookings Institution, said in an interview. “Definitely, profits are not growing given the stagnation in the economy. There are key products, like certain types of smartphones, that are seeing clear supply chain bottlenecks. These bottlenecks jump around from sector to sector, city to city, and impact production in complex ways.”
In October, Reuters reported that iPhone production at one of China’s main factories could drop by as much as 30 percent due to the country’s COVID-19 regulations, throwing a wrench in electronics pipelines ahead of the holiday shopping season in many Western countries.
By and large, economists say that Chinese production has held up relatively well over the course of the pandemic, as authorities have ensured that key factories have been allowed to remain open and adjusted regulations in line with changing economic forecasts.
During a press briefing Monday, National Security Council spokesperson John Kirby said that the White House officials “don’t see any particular impact right now to the supply chain” as a result of the civic unrest in China.
The real danger both for the Chinese population and the Chinese economy is that frustration over how the pandemic is being handled could subvert popular expectations about how and when a more substantial reopening will take place, which in turn could disrupt the government’s broader policy response.
“They’ve created a real problem for themselves on the level of expectations,” Dollar said. “They’ve eased up and altered their zero-tolerance policies a little bit, such as with the length of quarantine time. But whenever they ease up a little bit, people expect that this is the beginning of a full opening, which then they’re reluctant to do. So I think there’s a lot of dissatisfaction now.”
Rates of COVID-19 infection in China have been climbing in recent weeks, and the resulting crackdowns in social policy are adding to an environment that’s becoming less friendly to international business.
“You’re seeing a reversion to some of the more heavy-handed lockdown policies,” Willy Shih, a professor of business operations at the Harvard Business School, said in an interview. “It’s this kind of uncertainty that drives businesses to consider moving elsewhere and diversifying their supply bases.”
Confidence in China among U.S. businesses had already been shaken over the course of the pandemic due to the government’s stringent public health policies. One survey from May carried out by the American Chamber of Commerce in China found that more than half of respondents had decreased or delayed Chinese investments as a result of the pandemic.
“The foreign business community’s confidence in doing business in China continues to decrease, with 100 percent of respondents reporting an impact from China’s policies concerning the recent outbreak,” the survey from May found.
Former Commerce Secretary Mickey Kantor said in an interview that mounting friction between U.S. businesses and the Chinese government goes back even before the pandemic and can be traced to increased competition between the world’s two largest economies.
“This situation is not touch-and-go, it’s really a continuing process in which the U.S. has been somewhat of an aggressor,” Kantor said. “In cutting off high-technology exports to China and being very reluctant to allow U.S. businesses with export controls to do business in China — this is a huge factor for the Chinese economy and for the U.S. economy, as well.”
The nationwide unrest over the weekend drew comparisons on social media to the student-led demonstrations in China of 1989, which resulted in a violent crackdown on protesters by Chinese authorities.
American University School of International Service assistant professor Yang Zhang posted a video online of student protests at Tsinghua University, writing along with the video that such scenes were “very rare after 1989.”
Economist George Magnus of Oxford University’s China Centre said in an interview that he could see the current upheaval going in one of four different directions.
Either it could fizzle out as a temporary expression of pent-up frustration, and China’s zero-COVID policy could be accepted once again as an unavoidable if inconvenient status quo, or the government could capitulate to some degree and make concessions in line with public sentiment, risking an increase in infections and strain on the public health system.
“The middle way, which I suppose is most people’s feared way, is that they’ll use repression to basically imprison people and stamp out the protests. I’m not saying they’ll necessarily bring tanks out onto the street, but there could be violent repression and they’ll carry on implementing zero-COVID as sternly as they have been,” Magnus said.
“A glimmer of light would be that if the government is prepared to discriminate between protestors who are purely anti-zero-COVID and protestors who are taking more of a political stance, they might basically then continue to evolve zero-COVID into a policy that is zero-COVID in name only,” he added. “In other words, they’ll call it zero-COVID, but they won’t implement draconian lockdowns, they’ll relax on personal contacts and testing regimes, and so on.”