The infamous “zero-Covid policies” of the People’s Republic of China (PRC), the most severe of which were enacted in 2020, have had enormous impact on the global economy and supply chains. The government-imposed restrictions have caused a severe decline in China’s manufacturing capacity and logistics capabilities. The PRC recently relaxed their zero-Covid policies, causing those affected to see a light at the end of what has been for most a very deep, dark tunnel. The optimism was made apparent by the excitement of investors that sent Hong Kong’s stock market soaring nearly 8 percent and caused significant corresponding surges in many other financial markets.
Although seemingly minor, a few key changes to China’s domestic policies may alleviate the cumulative pressure on the supply chain and other operations felt by companies over the last few years. First, the required centralized, monitored quarantine time for individuals who come in close contact with an infected person was decreased from seven days to only five, with three of those five days permitted to be at-home isolation. Also, individuals who experience secondary contact will no longer have to undergo medical surveillance or quarantine. The PRC defines “secondary contact” as an instance of close contact with an individual having had close contact with an infected individual. Lastly, the PRC has promised to crack down on arbitrary lockdowns of citizens and punish governmental and private entities responsible for any such lockdowns. Easing quarantine requirements and the prohibition of arbitrary lockdowns (if adequately enforced) should allow companies operating in China to do so with increased confidence in work schedules and availability of goods.
Although things are moving in a positive direction, the recent policy changes likely will not amount to any noticeable alleviation of the supply chain struggles. Many stakeholders and investors in the Chinese economy understood the recent news to mean the PRC’s zero-Covid policies are over – that is far from the case. The policy changes are more accurately interpreted as the Chinese government laying ground work for future, hopefully larger, step-downs from the zero-Covid policies. Goldman Sachs described the enacted policy changes as “marginal,” amounting to little more than fine-tuning. Their spokesperson went on to say recent changes in policies would not have much, if any, implications for the supply chain in the near future.
Pending more significant substantive changes to China’s zero-Covid policies, we will see very limited impact on the Covid-era supply chain issues with which China and the rest of the world have become all too familiar.
Though we are optimistic, China’s policy adjustment should be met with caution. The Chinese government has softened its Covid policies on several prior occasions, only to implement harsher measures after slight rises in case numbers or the discovery of new variants. A precedent that should not be ignored.
If your business has been or continues to be negatively impacted by supply chain issues, it remains vital to stay up-to-date on policy changes as public authorities and private stakeholders continue to adjust restrictions that heavily impact global trade. There is also much that can be done in the present to alleviate negative impacts on your business.
A special thank you to our Fall Associate, Maxwell G. Owens, for his help preparing this client alert.
