How big an effect did lockdowns have on China’s economy?

May 27, 2020

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Activity may be returning to China’s cities, but the econmic peril there hasn’t disappeared. Workers are able to return to work, but customers around the world have stopped buying, leading to a dramatic drop in demand. Chicago Booth’s Chang-Tai Hsieh says that the lifting of lockdowns will allow us to see just how many businesses and jobs have disappeared as a result of the sudden cessation of activity.

Video Transcript

There’s been a lot of focus on the lockdown in the city of Wuhan and in the cities surrounding Wuhan. What may not be as well-known is that many other cities implemented the same lockdown policies.

When you lock down a city, it should be no surprise that there’s no economic activity. So the first thing that we documented is when you lock down a city, people can’t get to work. Businesses can’t engage in transactions. We’re putting together lots of indicators of the extent of activities in the industrial sector, the activities in the retail sector, and what you see is that immediately after the lockdown, all these things go way down.

The question is, what did other cities start to do? And what you do see is that there is a lot of evidence of a significant amount of heterogeneity. What I mean by that is that initially, for the first few weeks, every city tried to do the same thing. But then what you start to see is that different cities started to experiment. 

One city that looks like it ended their lockdown very early on is the city of Hangzhou, which happens to be the city where Alibaba is located. When you look at the extent to which people are moving around in the city, that’s a place where you start to see people go out a lot more, just a couple of weeks after the lockdown.

I think there’s a lot of interesting stuff to be learned about what it is exactly that they did. And the little bit of evidence I have is that they were able to harness the data provided by Alibaba, which is probably the largest web-based company in China—they are involved in everything—to basically track people and to identify who were the people that were healthy, and who were the people that were not. And now their technology is slowly being adopted by many other cities. There’s now this system of green light, yellow light, and red light that shows up on your phone, and you have to show this app in many places—when you want to go to the grocery store, when you want to get back to work.

I don’t think we have seen all the consequences yet. What is happening now is that Chinese cities have started to emerge from the lockdown. The city of Wuhan just ended the lockdown a few days ago. The city of Beijing is still under lockdown. What we’re seeing so far is that manufacturing activity is coming back, although the main problem that they’re facing is that now that their workers have come back, what they’re finding is that the rest of the world has gone to hell during this period.

So, the workers can come back to work, but what’s happening now is that their major source of demand, their customers, their exports, all of that has gone away because of what’s happened to the rest of the world during this time period. What hasn’t come back yet is the non-manufacturing sector, which in China, as in most countries all over the world, is the largest source of employment.

What I’m fearful of and keeping a close eye on is what is going to happen to unemployment in China in the next one or two months. I’m fearful that what we’re going to see in China soon is a massive wave of unemployment, similar to what we’ve seen in the US in the last few weeks. It hasn’t happened yet in China, but I’m fearful that it is going to happen.

I’m fearful that even when you completely loosen the restrictions, a lot of the key businesses, a lot of the key links in the economy, are gone, and it’s going to be something that is very difficult or it’s going to take a very long time to rebuild.

So it’s really not so much about loosening the restrictions, but it’s about the long-run consequences of basically freezing the economy for a couple of months, particularly for the millions and millions of small businesses that frankly just didn’t have the reserves and basically died during this time period. And I’m fearful that is what we’re going to see very soon in China, that a lot of businesses have effectively died, but we just don’t know it yet because it’s only now that the economy is opening up. Only after it’s opened up can we know for sure that they really are effectively dead.

The only precedent that we have for this in China is what happened from 1998 to 2012, when there was a restructuring and the closing of lots and lots of state-owned firms. During that period, you had about a hundred million workers lose their jobs. That didn’t go that well, but I think that case is different from what we’re seeing now for two reasons.

One is that what happened then was very geographically concentrated. It was geographically concentrated in some of the Chinese rust belt cities. It was also demographically concentrated. It was primarily older workers.

This is different, I think, because it’s something that is widespread that I think you’re going to see in most Chinese cities. It’s also, I think, going to be concentrated among the young and the middle-aged, but perhaps more among the young.