China's zero-Covid policy tests small businesses in a make-or-break it year

BEIJING — While China tries to shake off omicron, the country’s zero-Covid policy of swift lockdowns sets small businesses up for a third year of stop-and-start uncertainty.

It’s a critical time for that portion of China’s economy. Medium- and small-sized businesses in the country have an average lifespan of three years, the People’s Bank of China said in 2018, before the pandemic.

Although state-owned corporations play a significant role in China’s economy, it’s the smaller, non-state-owned businesses that account for the majority of national growth and jobs.

As the Covid situation worsened this year, central and local governments issued some support measures —such as rent waivers and tax refunds for certain affected small businesses, especially in services industries.

Shanghai, which is in a two-part lockdown this week, announced about 140 billion yuan ($21.88 billion) in tax relief, according to state media.

But many small businesses “don’t have any income, so cutting taxes and fees doesn’t work anymore,” said an economic analyst, who requested anonymity in order to speak freely about the Covid policy’s impact on growth, currently a sensitive topic in China. That’s according to a CNBC translation of the Chinese.

Businesses are looking to government policies for a clearer sense of whether it’s worth sticking it out for another year, the analyst said. Right now “small businesses don’t have enough confidence. They can’t see how the pandemic will pass.”

China’s Ministry of Commerce spokesperson Shu Jueting said Thursday that some small businesses involved with foreign trade face Covid-related problems for production. She said the ministry will work to implement measures such as tax and fee cuts, and guide local governments to introduce targeted support.

The Ministry of Industry and Information Technology did not immediately respond to a request for comment.

Mainland China is trying to control its worst Covid outbreak since the initial shock of the pandemic in early 2020 pushed the economy into contraction. The country returned to growth within weeks by using lockdowns to control the virus’ spread domestically.

China has stuck to its zero-Covid policy in the two years since, while other countries have shifted to a looser “live with Covid” policy in the last several months. The mainland has reported far fewer Covid cases or deaths relative to other major countries.

And even with the last few weeks of scattered lockdowns and travel restrictions around major economic areas, other parts of the country are less affected. Anecdotally, Beijing’s city streets are still filled with a fairly normal amount of traffic.

China’s National Bureau of Statistics said earlier this month the impact of Covid would be felt more at a local level than a national one.

China’s Center for Disease Control and Prevention warned in November how a coexistence strategy would likely result in hundreds of thousands of new daily cases and devastate the national medical system.

If the Covid situation remains severe, policymakers would allow more flexibility in how close GDP comes to the target of around 5.5%, said Zong Liang, chief researcher at the Bank of China, noting that growth above 5.1% is also possible.

Government policy can’t help all businesses, Zong said, noting the ones that can survive these three years will probably have a stronger ability to withstand risks.

Small businesses have struggled disproportionately while China’s overall economy has grown in the last two years.

The official Purchasing Managers’ Index for small businesses, an indicator of market conditions, has persistently reflected worse sentiment than large businesses. It has remained in contraction territory below 50 since May 2021.

The small business PMI ticked up to 46.6 in March from 45.1 in February, while that for medium-sized businesses fell below 50 for the first time since October, according to official data released Thursday. PMI for large businesses held above 50 with a 51.3 print.

The high transmissibility of the omicron variant behind the latest wave of cases in China has made tracking and controlling outbreaks harder, local governments have said.

In hard-hit areas like the northern province of Jilin and the southern metropolis of Shanghai, the new daily case count from the National Health Commission has remained elevated for the last few weeks.

An increasing number of reported new cases are asymptomatic, and outnumbering cases with symptoms. More than 6,600 such cases were reported for Wednesday on the mainland, mostly in Shanghai. That’s far above the 355 new confirmed cases with symptoms for the day.

To control spikes in Covid cases, local authorities have announced lockdowns of city districts or individual buildings with just hours’ notice, which can disrupt pockets of business activity.

While large companies operating factories have sometimes said they could maintain production by keeping workers on site, businesses reliant on storefronts or in-person interaction face greater uncertainty.

Anecdotally, a ride down one street in Beijing — near buildings closed last week due to Covid contact — found that all of the roughly 15 storefronts on the north side were closed, while those on the south side were open.

Also last week, police had to intervene in a dispute in which merchants sought Covid-related rent waivers at a major wholesale clothing market in the city of Hangzhou near Shanghai, according to the state-run China Internet Information Center. The report cited market managers as saying they’d yet to hear of rent waivers at a local level, and claimed the “pandemic must end” before such waivers could even be considered.

CNBC was unable to independently get a response from market operators or merchants.

Earlier in the month, Hangzhou’s government said it closed the market for Covid control but the health risk had ended as of March 18.

The state-run media report from China Internet Information said last week’s incident reflected a lack of local implementation of a central government document released on Feb. 18.

In the policy document, China’s top economic planner and 13 other government ministries announced support for services businesses, including calls for rent waivers or reductions if the landlord was a state-owned enterprise in a designated medium- or high-risk Covid area.

The document also called on local authorities not to arbitrarily expand high-risk areas of tight Covid control, or arbitrarily restrict areas for free movement.