China’s Zero COVID Strategy: Stairway to Heaven or Highway to Hell (Part IV)

The Cost of China’s Zero COVID Strategy on SMEs

On a macroeconomic scale, the government has kept a close eye and quickly stepped in to minimize the impacts of COVID on the country’s economy and its growth targets. But what about those who might be left outside of the government’s ‘warm’ embrace? What about SMEs and the private sector?

Unfortunately, small businesses have been disproportionately affected by ongoing lockdowns since the beginning of the pandemic. This is bad since SMEs account for 80% of jobs, 60% of GDP and about half of national tax revenue. They are vital drivers of the Chinese economy but have received little concrete support to overcome Zero COVID challenges thrown at them.

With millions of Chinese confined to their homes, retail sales last month dropped 11.1% compared with the previous year, sharply worse than March’s 3.5% contraction, according to data from the National Bureau of Statistics, their lowest levels since early 2020.

“Should I continue my business or just close it entirely? How can the government support small and medium enterprises? Without clear rules, we are shrouded in uncertainty”, says one small business owner operating a solar panel business in Shanghai and a kindergarten in Beijing, both affected in some way by the ongoing lockdowns. Things are even worse for their employees, many of whose salaries depend on customer footfall. “Policymakers should look out for vulnerable groups and enhance support for key industries and small and micro businesses to stabilize market expectations”, said Caixin Insight Group senior economist Wang Zhe.

Image Source: Reuters Photo, Daily Sabah

Some local governments in affected areas, like Shanghai, are offering relief packages to help small businesses deal with pandemic difficulties - Shanghai recently announced a 140 billion RMB (21.5 billion USD) relief package to help businesses deal with pandemic difficulties. The package includes tax relief and a three-month rent exemption for small tenants at state-owned entities. The issue here is that these measures will mean little for small private business owners because if you are not earning anything there will not be much tax to pay anyways and privately owned locations, which are the vast majority of rental spaces, will not receive any rent exemption.

An all too real example of severely affected sectors with the long Shanghai lockdown is the F&B and Hotel segments. Christopher St. Cavish, founder of a a boutique market intelligence company for hospitality and F&B businesses, presented figures from the Shanghai Statistics Bureau which show sales in the city's combined Food & Beverage and Hotel category fell at least 73% in April 2022 YoY - sales in April 2022 were 3.6 billion RMB (530 million USD). With restaurants in Shanghai essentially closed in April, it should have been nearly 100%, but he estimates the figure may include the sales of hotels that were used to quarantine close contacts of positive Covid cases. In an informal survey Christopher conducted with owners of independent restaurants or small chains, he found losses commonly amount from 600,000 RMB (89,000 USD) to 1.5 million RMB (220,000 USD), and more. One owner told that in 2021, his six restaurants did 5 million RMB (740,000 USD) in April. This year, that number was 200,000 RMB (29,000 USD), and only because they were allowed to open one restaurant for delivery in the last week of the month.

And getting back to business is not easy. An article in the South China Morning Post pointed out on Thursday that the approval process for re-opening is still a hurdle. Restaurants and retail outlets must go through a series of lengthy approval procedures before they can reopen.

Yet the complications and side effects of zero COVID on SMEs goes beyond sales interruptions and the difficulties of opening shops again. John D. Evans, Founder & General Manager SEIML, a Shanghai-based investment management firm, reported the struggles of the cease of banking operations all across Shanghai. China, for all its technological integration across many verticals, still requires a lot of manual/in person interventions (form filling and chopping) when dealing with banking operations, particularly when foreign exchange is involved. In this particular case, SEIML was notified by their client in Hong Kong of a significant payment on 31st of March. Normally, someone from the Bank of China would contact them within 48 hours to process the foreign payment into a CNY commercial account. But then came the 'fateful day in April' of the Shanghai lockdown and all Shanghai branches had ceased operations since 5th  of April and Bank of China had no backup plans whatsoever for a shut-down of operations in one of its regions/centers/branches.

This is not only the case in Shanghai. Other affected regions, like Hong Kong, have also had many bank branches closed, which affect both banks and their customers operations. One of many other undesirable side effect which can deeply affect not only the cash flow needs of certain SMEs, but also create a snowball effect that could lead to delayed payments of salaries, of invoices to suppliers and so on, which on small businesses can have a catastrophic effect - especially over a 2 month period such as the lockdown that has befallen Shanghai.

Image Source: Yahoo Finance

Another unfortunate example is that of industries which rely on live sports entertainment such as the ‘King of Sport’ – Football. Once upon a time (2016) Xi Jinping unveiled a “Great Football Dream”, a niche subset of his broader “China Dream,” but motivated by the same impulse: a strong desire to see China respected and admired on the world stage.

Xi’s high hopes for Chinese football encouraged a raft of investments – including a 1.7 billion USD football stadium under construction in Guangzhou. At the height of the boom, the Chinese Super League famously spent over 400 million USD signing foreign players in the 2016-17 transfer window.

But shifting priorities and two years since the pandemic started, this “Great Football Dream” as turned into a “Great Football Nightmare”. The Chinese Super League (CSL), China’s top football competition, usually begins in February or March and ends in November or December, but due to the COVID-19 pandemic, the 2022 season is yet to start and the preseason for some clubs is made under hotel quarantine. Players at Chongqing Liangjiang Athletic Football Club have even resorted to delivering waimai (takeaway) and driving Didi taxis to make ends meet, after it was revealed the club has not paid wages for 16 months. Even on an International stage, China is reducing its commitment after pulling out of hosting 2023 AFC Asian Cup over Covid-19 concerns.

The founder of Wild East Football, Cameron Wilson a leading international commentator on Chinese football, has tried to describe why this is happening. In short, conglomerates bankroll Chinese football clubs, mainly to be seen to be supporting government aims, and they derive a lot of brownie points from that. But a range of pressures including slowdown of globalization, international tensions, the pandemic and a focus on the domestic economy as part of the ‘dual circulation’ strategy have caused both business and government to focus on things they consider more important than Chinese football. This is why, for example, Jiangsu FC, the 2021 national champions owned by retail giant Suning (that also holds a majority stake in Italian league leaders Inter Milan), ceased to exist only a few months after becoming champions when Suning put them up for sale.

Image Source: Yahoo Sport

All in all, there is a great many deal of industries, big and small, which have been hurt immensely from Zero COVID. But that is not to say there are no winners. For one, Chinese healthcare companies have hit the jackpot since demand for Covid-19 test kits has delivered a windfall for diagnostics firms, with one seeing a profit surge of as much as 6500%. But there are also many creative entrepreneurs which have given a new meaning to the “when life gives you lemons…” proverbial phrase:

• Mankattan（曼可顿）, a bakery manufacturer that was acquired by Bimbo in 2018, said that it has boosted its social ecommerce targeting individual compounds in Shanghai, since the end of March, when the lockdown was put in place. People had to stay indoors and relying online ordering from a rather limited number of retailers who were able to do offline delivery, in addition to government free rationing.
• Mengniu（蒙牛）, one of the few national dairy companies in China, is also thankful to social ecommerce for its Shanghai factory. "(The lockdown) has promoted neighbourly harmony and facilitated group buying in communities," concurred Pan Guangyong, a supply chain manager from Mengniu. Pan has lived and worked inside the Shanghai factory since 15th of March. "We procured 40 bunk beds and had staff holed up wherever there is enough space, and some staffers left to pick up some clothes but were then confined at home just when the lockdown was clamped down."
• Yongpu Coffee（永璞咖啡）delivered coffee to around 20 residential compounds a day in the first few weeks of the lockdown, but engaged third-party businesses to cover more than 200 compounds later, according to Tie Pi, Founder of the startup company. 
• Oatly, whose sales used to be 80:20 between the catering channel and the retail channel, also benefited from social ecommerce, which they gave more efforts to since mid-March, and thus substantially boosted the sales proportion of the retail channel. "Our 300 some workers were under lockdown in more than 300 compounds," said David Zhang, general manager of Oatly, and they were conveniently mobilized to engage in social ecommerce. He also said that its plant-based ice cream also sold well in Shanghai, with more than 200,000 such ice creams being sold in a week, overwhelming its suppply chain network, thanks to social ecommerce.
• Fonterra has joined the social e-commerce wave and the dairy giant will introduce more small-pack-size cheese and butter to the China market, said Bo Shuangyu, a senior manager with the company, as the country is going to make it a daily routine to fight against and co-live with coronavirus.

Image Source: BBC News

Despite a few examples of lockdown commerce innovation, tenacity and quick adaptation to shifting market dynamics, not all businesses can adjust this quickly or even survive at all in an environment of no circulation. Even those fortunate enough to launch successful initiatives during the lockdown period, will not maintain their success with the same strategy once life in society returns to ‘normal’. It is this uncertainty that haunts many of those who rely on consumer spending and do not have any alternative but to rely on domestic/local markets.

What about companies who rely on China not necessarily for its domestic market, but rather its supply chain infrastructure?

I will explore more in my next article.

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This is an 8-part article series, which delves into the latest developments and impact of China´s Zero COVID Policy:

1. China’s Societal and Healthcare Concerns
2. The (Acceleration of) China’s Expat Exodus
3. The Costs of China’s Zero COVID Strategy on the Economy
4. The Costs of China’s Zero COVID Strategy on SMEs
5. The China Supply Chain Nightmare
6. The World and MNC’s Exposure to China
7. Deglobalization and Decoupling: Myths and Realities
8. Updates on China’s National and International COVID Policy

*All data, images and news sources have been properly hyperlinked in the article.

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