Black Markets Thriving In China As Punishing COVID Lockdowns Evoke Planned Economy Of The Past

Chinese stocks got slammed overnight as rumors about a potential lockdown in Beijing have sent people scrambling for food and other necessities (many items, like fruit, coffee and even disposable diapers are now considered “frivolous” under the terms of the lockdown in Shanghai). Meanwhile, the situation in Shanghai, having entered its 4th week (and even longer in the eastern part of the city), has spurred a level of need that is not only leaving citizens desperate – but also reminding many of the bad old days when central planning was the status quo in China, creating an environment that allowed black markets to flourish.

Indeed, as the New York Times reports, black markets are flourishing once again in the lockdown era, but this time around businesses are the main participants as they scramble to find ways to meet their customers needs while complying with impossibly strict CCP measures.

As a result, the costs of purchasing certain essential items – including day passes to travel on Shanghai’s mostly deserted streets, are costing businesses the equivalent of $2,000 per day, costs that are being passed down to consumers.

Because of Covid restrictions, commercial trucks have a hard time delivering food and household goods to Shanghai. Inside the city, only vehicles with passes are allowed on the road.

On the black market, some operators are willing to pay $2,000 for a day pass. The cost is then priced into the groceries they sell to the residents.

One owner of a logistics company who spoke to the NYT said the situation in China is so bad, it’s without precedent.

“I’ve been in the logistics business for 28 years,” Mr. Yang, 47, said in an interview. “But I’ve never seen a mess like this. There were numerous emergencies to deal with.” He estimates that he lost tens of thousands of dollars in March.

For those who are wondering why China’s leadership is choosing to inflict so much pain on its population after confirming such a relatively small number of cases and deaths, the NYT reminds us of President Xi’s latest position on the lockdowns – which has been, essentially, to double down.

But Mr. Xi has not budged from his zero Covid position. “Perseverance is victory,” he said on April 13. The state media, provincial party secretaries and lower-level government officials all know who is in charge and are eager to show their loyalty. Many local officials are escalating pandemic-control measures so they don’t risk an outbreak that could put their positions in danger.

Adding what seems like another helpful piece of context, the NYT confirms that companies in Shanghai can’t really operate right now unless they can create a “closed loop” system – which would mean forcing workers to live at work, something we have already described in detail.

Some factories in Shanghai, such as Tesla and some of its suppliers, have resumed production. But they must follow a set of complicated and expensive pandemic-control measures, including creating what’s called a closed-loop management system in which workers live on-site and test regularly for the virus.

Not many companies are willing or able to do this. One senior executive of a major logistics company told me that they have only a few thousand delivery workers back on the job in Shanghai because they lack the capacity to provide lodging for so many workers. That’s significantly lower than the more than 60,000 delivery workers the company had in peak seasons in the past few years.

As they struggle to deal with a government that’s totally unsympathetic to their plight, business owners are quietly wondering how much longer they could hold out without completely draining their cash reserves.

The chief executive of a high-flying consumer brand is also wondering how long her company’s cash can last. The company raised $100 million last year and had ambitious expansion plans, she said in an interview. But nearly a third of her company’s 150 retail stores had to shut their doors in locked-down cities. Their online sales, which weren’t hurt in 2020, are suffering now because many cities shut the highway exits, halting e-commerce deliveries.

Finally, as the Shanghai lockdown drags on, people are growing increasingly worried about not just the spread of lockdowns, but the spread of the economic stressors that they are creating.

John Ji, a real estate developer in Nanjing of Jiangsu Province, is anxiously watching the lockdowns in Shanghai and other cities. He believes that many people will lose their jobs and have difficulty paying mortgages. When nobody can afford housing, he asked, who will buy his apartments?

The results could be truly devastating.