China unrest: Risk implications

The second largest economy in the world and an essential supply chain cog for organisations in every area of the globe, China’s social unrest in recent days has sparked international concern. 

Starting on the weekend, crowds gathered in major cities, including capital Beijing and economic-hub Shanghai, to demand the government change its harsh COVID rules.

The restrictions have been enacted as part of China’s ‘Zero-COVID’ policy – an approach which steadfastly seeks to eliminate COVID from the country entirely. However, the policy means that just a few detected cases can cause entire cities to be placed in strict lockdowns.

Nearly three years after the first COVID case was discovered, the Chinese people have been placed in a long series of restrictions and lockdowns. While much of the rest of the world has returned to a form of normality, a recent spike in cases in China has seen the country return to its harsh lockdown policy.

Tired and frustrated

“There is a sense of tiredness amongst the population,” said Aidan Conaty, director of TCI China, a consultancy for organisations working in China. “People have been living in a heightened state of alert for almost three years.

“Many now feel there is an overreaction to COVID by the government. People are frustrated by the sledge hammer approach to COVID prevention.

“Last week, a factory which makes transport products with 3,000 employees received a visit from one of its key customers. The customer tested negative going into the factory but tested positive before he left. This resulted in the entire 3,000-strong workforce being ordered to lockdown and remain at the factory for a number of days,” he said.

Last week, a fire in an apartment block in northwestern China’s Xinjiang region killed 10 people and injured nine. Xinjiang has been placed under harsh lockdowns for over three months to supress COVID, with claims that fire engines were blocked by pandemic control barriers and cars stranded after their owners were put in quarantine.

Conaty noted the ongoing men’s football World Cup, taking place in Qatar until 18 December, has highlighted to much of the Chinese population that the rest of the world has moved on.

“Many people in China are watching the World Cup and seeing so many fans from across the world attending matches – all unmasked, smiling and singing together.”

Protest not revolt

Andrew Gilholm, principal and director for Greater China and North Asia at Control Risks, said the challenge – especially for global or regional managers who might not be China specialists – is making an objective assessment of the situation, outlook and practical implications.

“Recent events are pretty extraordinary and in some ways pose an unprecedented challenge to the authorities’ capacity to manage the situation,” he said. “But that capacity is very strong, and this is still very far from being a systemic stability issue.

“[Media] reporting and social media have heavily focused on the instances of protestors publicly making political demands and criticising the leadership, which is rare, but that is not representative of most protests – they have mostly been about zero-COVID controls.”

Gilholm said the protests have not been large pro-democracy protests, and the parallels being made to the 2019–2020 Hong Kong protests and the Tiananmen Square protests in 1989 are highly misleading.

“People should certainly be monitoring this very closely, because this is still playing out and it is unpredictable, but it is important to keep it in proportion and look closely at what actually has – and has not – happened so far, as well as the fundamentals of what is likely in the Chinese system,” he said.

Length of disruption

While the swelling of protests started on the weekend, they have continued into this week, so how long could they last?

“The authorities will not allow a protest movement to occupy China’s streets for any length of time,” said Mark Williams, chief Asia economist at Capital Economics. “If the protests continue, a crackdown is very likely.

“They have no good options in the near-term to address protestors’ demands: relaxation of strict COVID control policies would almost certainly lead to a surge in deaths that would destroy the leadership’s claim to have responded effectively to the pandemic,” said Williams.

However, Conaty said the government in China is listening and has begun to ease the severity of the sanctions.

“People are starting to notice fewer travel restrictions and fewer requirements for mass testing,” he said. “Beijing still remains a centre of high alert so extra testing requirements are needed for those visiting the city.”

Risk implications

As for how the unrest will impact the plans and approaches of global risk managers, the restrictions that caused the riots have created problems of their own.

“A lot of factories are in financial trouble in China,” said Conaty. “Due to rules restricting mass layoffs, many simply are unable to let staff go.

“Risk managers need to conduct more due diligence on their China partners. The grey financing market in China is starting to cause good businesses to close. This will be particularly evident over the Chinese New Year holidays [in January],” he said.

Conaty continued that the Chinese government is worried about state of the economy and it likes to avoid protests.

This may mean it brings in policies that will encourage domestic growth. However, for international business, 2023 will again prove a very difficult for many firms, he said.

“What has become evident over the COVID restrictions in China is that employees want to return back home to their families. I would not be surprised with the sluggish economy in China that people will be allowed to return home to their towns and villages earlier and asked to remain there for a longer period after the holidays,” said Conaty.

“This will cause production delays and potential quality issues for many sourcing from China. It may also mean a drop in purchasing of luxury brands, for example, as people will not be spending,” he added.

Little security risk

Gilholm said that major Chinese cities remain safe and stable locations, while we are not witnessing violent protests or major physical crackdowns.

“Certainly organisations have to consider that personnel who join, or are in the vicinity of, protests could face risks of detention, or exposure to violence if matters escalate,” he said.

“Unless you are directly in or around protests, there is little security risk generally. Things could change, but escalation to a level where there are widespread violence or property destructions outside of very isolated incidents, or very large protests running on for days or weeks that shut down parts of the city, is unlikely in most places.”

Gilholm added that unless matters change dramatically, protests are not likely to be major supply chain disruptors as these are not industrial or labour protests, nor are they targeting manufacturing or transport.