On the streets of Shanghai, where some neighborhoods have allowed residents to leave their compounds for the first time in months, relief at the prospect of a return to normal is audible. In one district, residents thronged together and sang an impromptu rendition of Tomorrow Will Be Better—a soaring, Band Aid–style Chinese ballad from 1985.

But for the local government, hard times remain ahead. Eight weeks of economic inactivity has slashed the city’s economic output by around 50%, while extended emergency measures—such as routinely testing millions of residents—has strained government coffers.

The city is exiting its COVID lockdown but now faces a new challenge: starting its economic recovery.

The price of lockdowns

China’s economy is currently in a slump not seen since early 2020, with retail sales down 11% and industrial output down 3% in April compared to the same period last year. But the downturn in Shanghai, which implemented the strongest COVID controls of all Chinese cities battling Omicron outbreaks this year, is significantly greater.

According to data from Shanghai’s statistics agency, the city’s industrial output fell by 61.5% in April compared to a year earlier. Retail sales fell by 48.3% over the same period. The dire decline in Shanghai’s sales and production comes on the back of weak first-quarter results. The city’s economy grew at just 3.1% in the first quarter of 2022, below its 5.5% target.

Shanghai’s lockdown has had significant consequences beyond just the local economy. Analysts from the Russell Group estimate that China’s lockdowns—which hit several cities besides Shanghai—had cost global trade about $28 billion, diminishing exports of textiles and cars and cratering demand for imports of products like meat.

With local, national, and even global economies suffering shockwaves from Shanghai’s lockdown, the city’s government is at pains to plot a clear path out of the current COVID-induced slump.

Exit strategy

On Sunday, city officials said they would remove “unreasonable” curbs on businesses starting June 1, including scrapping its “whitelist” of companies that were allowed to resume operations during the city’s lockdown. Previously, only companies in sectors deemed critical, like vehicle manufacturing, could apply to restart production under a “closed-loop” system, where workers live on-site to prevent COVID infections from disrupting operations.

Shanghai officials announced dozens of other measures to support the economy and revitalize business operations. Businesses will be granted more time to pay their taxes, and banks have been asked to renew loans for small and medium-size enterprises.

Shanghai will also offer a maximum of $450,000 to encourage companies to keep workers on staff. National unemployment inched up to 6.1% in April during Shanghai’s lockdown, and young graduates are increasingly reporting a scarcity of job openings. 

The city’s car market is in line to receive a stimulus injection too. No cars were sold in Shanghai for the entire month of April, according to the Shanghai Automobile Sales Association, as dealers were closed under lockdown measures. To encourage car purchases, Shanghai officials will increase the quota of vehicles in Shanghai by 40,000, as well as reduce taxes and offer subsidies to those buying electric vehicles. 

Shanghai’s economic recovery plan follows the announcement last Tuesday from China’s State Council, outlining $21 billion in tax rebates and deferred loan payments. China has now announced $396 billion in tax cuts for 2022, slightly ahead of the level implemented in 2020 as the pandemic began, as the country grapples with the economic consequences of its COVID-zero policies.

Continued tests

Yet China has also pledged to continue its COVID-zero approach, even as it seeks to loosen lockdown measures in cities like Shanghai and Beijing. The government has pledged to provide COVID testing sites within a 15-minute walk of any resident in a major city and is still expecting to build makeshift hospitals to house COVID patients in the event of an outbreak.

A report by Reuters estimates that the Chinese government will spend over $52 billion on measures to combat COVID-19 this year, including conducting frequent mass COVID tests and building medical facilities. In the two months from March, China built 300 hospitals to handle COVID patients at a cost of $4 billion, one analyst told Reuters. A review of existing tenders by Reuters estimates that Beijing plans to build another $15 billion worth of new medical facilities.

China’s determination to maintain mandatory COVID tests is a boon for at least some businesses. One Hangzhou-based COVID test maker, Dian Diagnostics Group, more than doubled its first-quarter profit to $122 million, with just under half of its revenue coming from government mass COVID testing schemes. 

But the combination of increased fiscal stimulus and continued COVID spending means “it seems clear that China’s fiscal situation could deteriorate” over the rest of the year, write Natixis economists Alicia Garcia Herrero and Jianwei Xu in a Thursday note, as COVID zero threatens to undermine the government’s target for economic growth.