(Bloomberg) -- Before October, Qiang had about 30 workers in his garment factory in Guangzhou’s Haizhu, a district often dubbed the apparel manufacturing capital of China. After more than a month of Covid lockdowns, all of them have fled, bringing production to a halt.
“Those who went home are watching to see when to come back,” said Qiang, declining to provide his full name for fear he’ll face repercussions for speaking publicly. “I need to restart production the moment the sub-district gives us the green light.”
Even as China slowly pivots away from Covid Zero by relaxing rules in key cities -- partly in response to widespread public anger against the punishing regime -- a web of relentless curbs continues to hamper factories like Qiang’s, many of which remain in high-risk areas subject to more-targeted but still lockdown-like restrictions. Supply chains remain strained, with larger companies struggling to keep production lines humming. A recent surge in infections has also raised doubts over the efficacy of the so-called closed-loop system, the pandemic-era hack that isolates workers in bubbles.
Easing disruption for manufacturing hubs is crucial to reviving China’s economy, which is expected this year to grow at the slowest pace since the 1970s, excluding the slump at the start of the pandemic. Several prominent government-linked economists have recently urged authorities to shift their focus back to promoting expansion.
In late October, Haizhu was locked down because of a Covid outbreak, confining workers in densely populated urban villages to cramped tenements for weeks. Clashes with authorities ensued even before the wider anti-Covid demonstrations in late November. As a way to quell discontent -- and bring down cases -- the government urged Guangzhou’s migrant workers to return to their hometowns, causing a mass exodus. And then, in a pivot, Guangzhou lifted broad lockdowns in most parts of the city on Nov. 30, replacing them with more targeted restrictions.
“The easing was so abrupt, so everyone’s in a dilemma right now,” said Qiang, who estimates that over 80% of Haizhu’s workers have left. Public health workers in full PPE still control entry points into Lujiang village where his factory is, and the region’s largest fabric market nearby is still shuttered indefinitely, he said. “Nothing is back to normal yet.”
Deployed during Shanghai’s brutal two-month lockdown earlier in the year, closed loops were sold as a way to do Covid Zero while keeping China’s factories open. But even they’ve lost their effectiveness. Not only have restrictions meant companies can’t get the parts to operate under any circumstances, but they’re a recipe for discontent -- especially in the current environment.
The shortcomings of the closed-loop system were laid bare last month when irate workers at the world’s largest iPhone factory in Zhengzhou, roughly 400 miles south of Beijing, clashed with security staff, leading to chaos. As Foxconn Technology Group, Apple Inc.’s key device assembler, attempts to woo back workers who fled, the company doesn’t expect full production to resume until late December or early January, Reuters reported Monday. Meanwhile, Foxconn has revealed a big drop in November sales.
“The closed loop model had shown its limits,” said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis. “It’s clearly unsustainable, as Foxconn’s case has shown that workers are no longer ready to accept such inhuman conditions.”
Some carmakers opted to halt output over the past month instead of deploying closed-loop systems. As Chinese cities start to move away from broad, sweeping lockdowns, Volkswagen AG says it has resumed operations, though production may still be impaired at “very few sites,” a representative said Monday. Honda Motor Co. too has resumed operations at its plant in Wuhan after shutting down last week because it wasn’t able to secure sufficient staffing.
Supply chains are still unstable, with travel between provinces and even in and out of China’s cities still subject to multiple testing requirements, said Maximilian Butek, head of the German Chamber of Commerce in Shanghai.
Nissan Motor Co. Chief Executive Officer Makoto Uchida warned in an interview with Bloomberg News last week that disruptions from Covid-linked shutdowns are making it more difficult to operate, while reiterating his commitment to the Chinese market.
“Frankly, it’s worrisome,” Uchida said. “We have a lot of operational impact already.”
Back in Guangzhou’s Haizhu district, work is slowly resuming in areas deemed by authorities as low risk for Covid spread. In the Pazhou Economic Development Zone, 51% of companies have restarted work, district officials said at a Covid briefing on Nov. 29.
Ah Qi, who operates a textile factory in Haizhu’s Tuhua village, has reopened, though with only half the workers she had pre-lockdown.
“Honestly, I won’t be breaking even because we rejected most of the orders that came in last month,” she said. “We didn’t think the lockdown was going to end anytime soon. It lifted at a really awkward time.”
With China’s annual Lunar New Year break looming in late January, there’s a risk workers who headed home to avoid lockdowns won’t return until after the usual week-long holiday, the most important on the Chinese calendar. That could limit any economic upside from China starting on its path toward the easing of Covid Zero.
After months of fixating almost exclusively on the goal of suppressing Covid, authorities are now trying to reduce the future fallout for business. In Guangzhou’s less-impacted Huangpu and Panyu districts, factories have been told that they won’t shut down even if there is an outbreak. Instead the government will immediately move the infected and close contacts to designated quarantine centers, and disinfect the area, Panyu district deputy head Mai Jieping said at a Dec. 2 briefing.
In Huangpu, a key industrial area in the city, the government has helped companies secure transportation passes to ensure supply chain continuity during outbreaks.
While the looser measures in cities can’t be interpreted as China abandoning its Covid Zero policy yet, “we see them as clear evidence of the Chinese government preparing for an exit, and trying to minimize the economic and social cost of Covid control in the meantime,” Goldman Sachs Group Inc.’s chief China economist Hui Shan and colleagues wrote in a note. Their base case scenario suggests China will maintain virus restrictions until April to allow for preparations for exiting.
As part of those moves, authorities and state media have recently been downplaying the severity of Covid, an about-turn that’s aimed at shifting the public’s mindset on a disease they’ve been told will likely kill them for most of the past three years.
“Covid isn’t scary,” said Qiang, the Haizhu garment factory owner. “What’s more terrifying is not being able to earn money.”
--With assistance from Danny Lee, Fran Wang, Charlie Zhu, Daniela Wei and Yujing Liu.
©2022 Bloomberg L.P.
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