Why China’s Economy Faces a Perilous Road to Recovery

Three weeks after Xi Jinping, China’s top leader, tried to reinvigorate China’s stalled economy by abruptly abandoning his stringent pandemic restrictions, he struck an upbeat note in his annual New Year’s Eve address. “China’s economy has strong resilience, great potential and vitality,” he said.

But that optimism is hard to find in downtown Guangzhou, the commercial hub of southern China. Nearly three years of “zero Covid” measures have crushed businesses. Streets are lined with shuttered stores and workshops. Walls are plastered not with “help wanted” signs, but with notices from entrepreneurs putting their businesses up for sale. Roads and alleys once packed with migrant workers are now mostly empty.

China’s reversal of its Covid restrictions in early December was meant to help places like Guangzhou. But the chaotic approach has contributed to a tsunami of infections that has swept across the nation, overwhelming hospitals and funeral parlors. In many industries, truck drivers and other workers have quickly fallen ill, temporarily stretching staff and slowing operations.

Now, faced with an unpredictable — and uncontrolled — epidemic and financial uncertainty, people and companies are spending cautiously, suggesting that the road to recovery will be uneven and painful.

China is also confronting broader challenges beyond its borders. The global economy is slowing, dragged down by high inflation, an energy crisis and geopolitical turmoil. As American and European shoppers tighten their budgets, China increasingly faces a double blow of slumping demand both at home and abroad.

Weak spending is further depressing the already razor-thin or nonexistent profit margins of many of the small private businesses that power China’s economy.

In Guangzhou, Tony Tang, the owner of a fifth-floor workshop that makes women’s clothing, said his sales had plunged by two-thirds in the past year. Competition among small factories in China and overseas is fierce, pushing down the wholesale price he can charge for a woman’s jacket with no brand name from $14 to $11.30 apiece.

Mr. Tang’s work force has shrunk from 30 to 10, but there is no shortage of labor. When he needed a worker to help sew an order of halter tops, he went out on a street corner with a handmade cardboard sign and hired one within several minutes, for one-sixth less than he paid about a year ago.

The problem, Mr. Tang said, is a lack of orders. His workshop has “a lot of workers, but we don’t have work to do,” he said.

China’s factory activity contracted further in December as rapidly spreading infections grounded workers, snarled deliveries and dampened demand, according to a survey of manufacturers that the government released on Saturday. For service industries like restaurants, the same survey found, business was almost as bad as in early 2020, during the nearly nationwide lockdown that followed the first Covid outbreak in the city of Wuhan. Eateries and other businesses closed last month as customers stayed home to avoid infection or because they were sick.

“The epidemic has had a great impact on the production and demand of enterprises, the attendance of personnel, and logistics and distribution,” the National Bureau of Statistics said in a statement that accompanied its release of the survey data.

Manufacturing had already been in decline in November, when many cities and regions in China imposed lockdowns on residents in a futile bid to contain outbreaks. Car dealerships are crammed with unsold cars. Stores have little need to order more for their shelves when they are already full of unsold merchandise.

Nio, an electric car manufacturer in east-central China’s Anhui Province, said that Covid outbreaks had affected its supply chain and reduced its car deliveries in December. Tesla suspended the production of cars at its factory in Shanghai for the last week of December, a move that Yale Zhang, managing director of Automotive Foresight, a consultancy in Shanghai, saw as a sign of flagging sales in China and elsewhere, partly because other automakers are introducing more electric cars.

But even as many cities and provinces are in the throes of deadly outbreaks that have silenced once-busy streets, in other places, there are early signs that economic activity is resuming. In a few cities in northern China like Beijing, which saw widespread outbreaks that have since peaked, people have been going out again in recent days.

The lifting of quarantine rules has helped drive sales of airline tickets ahead of the Lunar New Year holiday later this month. The removal of onerous Covid restrictions like daily P.C.R. testing on people and imported goods has saved time and money for companies and workers.

Xu Zeqiang, a truck driver in Yangjiang, a city in southeastern China that is a hub of knife and scissors production, said that he and his driving partner could now complete a round trip from Yangjiang to the ports at Shenzhen, 200 miles away, in a day, instead of two or three days.

“In the past, we could be stopped for P.C.R. test results and health code checks — now, it’s not required anymore, you can come and leave any time,” he said.

Many European manufacturers in China have been forced to operate with about half their usual staff for two to three weeks, affecting output somewhat, said Klaus Zenkel, the chairman of the chamber’s South China chapter. As a precaution against lockdowns, many companies had accumulated spare parts in warehouses before the Covid wave and have relied on those to keep running.

But to save on costs, a few small suppliers of specific components have stopped operations early for the Lunar New Year holiday, which starts on Jan. 21. “Everyone managed a way to continue somehow, to keep the damage at a minimum,” Mr. Zenkel said.

The damage that “zero Covid” inflicted on China’s once-unbeatable attractiveness as a manufacturing hub could be hard to repair.

Lockdowns and closed borders slowed or disrupted deliveries of goods and prevented many companies from sending buyers to factories. Some global retailers, seeing risk in overreliance on China, have turned instead to other countries for supplies. Walmart, for example, plans to ramp up imports from India to $10 billion a year by 2027.

Even Chinese exporters are trying to diversify.

In Yangjiang, Velong Enterprises, a Chinese manufacturer of knives, grilling thermometers and other kitchenware for Walmart, Ikea, Target, Carrefour and other retailers, is expanding its operations in Cambodia, Vietnam and India. It has shrunk its work force in Yangjiang from 1,700 to 1,200 through attrition and is considering potential factory sites from Mexico to Turkey, said Jacob Rothman, a co-founder and co-chief executive.

Companies like Velong find some savings when they venture out. The company pays workers in Cambodia half as much as its workers in Yangjiang.

But China’s strengths in industrial prowess and labor, even in the midst of a raging epidemic, are hard to beat.

A fifth of Velong’s remaining factory workers in China are now out sick. But the company has been able to avoid missing deliveries by hiring temporary workers from among the large pool of workers in Yangjiang with knife-making experience, said Iven Chen, the company’s other co-founder and co-chief executive.

“Our employees can be trained in five to eight days, and the skilled ones need less than one day,” said Ye Yuanqiang, a factory production manager at Velong. “I have worked in Cambodia, and sometimes I can’t train them well in two months.”

The pressure on exporters has only intensified in recent months. China’s exports fell in November compared to a year earlier, led by a 25 percent plunge in exports to the United States. Households in the West had spent heavily on exercise equipment and other manufactured goods from China during the first two years of the pandemic, but are now more budget-conscious as prices rise.

The Communist Party has pledged to spur domestic demand to revive growth. But convincing people to spend after three years of stop-start activity and punishing lockdowns will be tough. Many Chinese workers are now looking for ways to rebuild their savings, even as the Lunar New Year holiday approaches, a time when families used to splurge.

“The overall wages are quite low, you can’t make much money,” said Gong Shuguang, a garment worker in Guangzhou who plans to stay in the city for the holiday instead of returning to his hometown in Sichuan Province for a family reunion. He lost two months’ wages during a Covid lockdown in the autumn.

“I want to find more work to do,” he said late last month. “I have worked here for seven or eight years and this year is the worst.”

Li You contributed research.