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Chinese Factories, Restaurants Adjust to Life Without Zero-Covid

After three years of “zero-Covid” economic disruption, many Chinese businesses awoke to a happy new reality in December: No more restrictions.

But before they can take advantage, business owners in the world’s second-largest economy say, they have to get their supply chains in order after a topsy-turvy time capped by this abrupt reversal—and withstand a wave of Covid-19 cases sweeping through employee ranks.

“Everyone fell ill almost at the same time,” said

Hong Binbin,

manager of toy maker Shenzhen Jiaoyang Industrial Co., describing an early December Covid surge that took out 90% of his staff in two weeks. The labor shortage forced him to delay a shipment of custom toys to a South Korean client to a January delivery date from the original Dec. 25.

Mr. Hong, who himself caught the virus at the end of December, said he felt helpless and frustrated at the lack of warning and follow-up guidance around the dismantling of the stringent Covid restrictions. Now, he is concerned that clients, fearing a wave of reinfections in the southern metropolis of Shenzhen, may withhold orders.

Since China’s last major restrictions were scrapped on Dec. 7, the pandemic has spread quickly across the country. Businesses describe being unprepared for the sudden end to widespread testing, mass quarantines and city lockdowns, and the labor shortages that followed as workers fell sick. 

Manufacturing and service-sector activity fell in December to their lowest levels since February 2020, when the virus first spread across the country, the government reported Saturday. Economists say these struggles could ripple out across supply chains and affect the global economy.

Overseas demand for Chinese-made goods has stagnated.



Photo:

Cfoto/Zuma Press

“The world is connected through China-centric supply chains,” said

Stephen Roach,

a senior fellow at Yale University and former Asia chairman at

Morgan Stanley.

“Any ‘kink’ in those chains spells trouble for global production and the world economy.”

But the prospect of a large number of cases in January—a time of year when business activity is disrupted anyway, by the Lunar New Year holiday—has many in the manufacturing and service sectors optimistic that normalcy could come as soon as the beginning of February. 

“It sounds strange, I think it’s rather helpful than harmful,” said

Andreas Nagel,

Shanghai-based chief commercial officer at Stulz, a maker of climate-control equipment that was hit in December by a wave of Covid absenteeism. “We have a real chance of getting back to normal after Chinese New Year.”

Restrictions are coming down as overseas demand for Chinese-made goods stagnates, with November exports down from a year earlier at the steepest pace in more than two years.

Philip Richardson,

owner of Trueanalog Strictly OEM, a manufacturer of audio equipment in Panyu, just outside the southern manufacturing hub of Guangzhou, said his company faces a double whammy: Covid-induced disruptions and a painful downturn in the business cycle, both radiating through the supply chain.

Overseas customers are generally overstocked after bottlenecks in China’s supply chain finally opened up earlier in 2022, said Mr. Richardson, who has been in China for more than two decades.

In the absence of mass testing, it is hard to track the virus’s advance. But conversations with business owners scattered across the country suggest it spread quickly across northern China early in December before moving to Shanghai and southern China. Hospitals filled up with mostly elderly patients, while working-age people were mostly able to bounce back after a week or so.

In the central city of Zhengzhou, employees at

Apple Inc.’s

largest iPhone contract manufacturer,

Foxconn Technology Group,

have described a relatively rapid spread of the virus through the workforce, though analysts and people involved in the supply chain believe that production is beginning to catch up to demand for the costlier Pro models.

Many plants, hit by waves of infections, have simply brought forward planned Lunar New Year production halts.

Xie Haifeng, a 38-year-old forklift operator in Shanghai who reports that half of his team is sick with the virus, said he would return to his hometown in nearby Jiangsu province earlier than usual to celebrate the holiday. His employer, Yanfeng Global Automotive Interiors Co., which supplies parts for

Tesla Inc.

and other auto makers, plans to allow workers to leave five days before the weeklong holiday formally begins on Jan. 21.

Discount Covid test kits attracting a crowd in the southwestern province of Guizhou last month.



Photo:

Cfoto/Zuma Press

The labor crunch is hitting the service sector as well. Shanghai Disneyland said its theme park, with its workforce reduced, has shut or scaled back some live shows, attractions and restaurants. The theme park didn’t respond to a request for comment.

Covid is also keeping customers away from some businesses.

Xu Hengqiang, who sells rice noodle rolls in Shenzhen’s populous Bao’an district, said orders in the last week of December were a fraction of the usual as cases in the city continued to rise. Delivery orders and walk-in customers totaled about 90 on Wednesday and again on Thursday, he said, compared with about 500 on a typical day.

Most of his dine-in patrons have already caught the virus, he said, while online orders have dried up as customers worry the virus will inadvertently be delivered to their door—a common concern in China, where authorities have urged disinfection of frozen foods and other goods.

China’s usually efficient logistics networks also were temporarily paralyzed by the wave of Covid infections, prompting e-commerce giant

JD.com Inc.

to dispatch 1,000 workers to Beijing to clear a backlog of deliveries and Shanghai authorities to offer daily incentives of about $8.60 to entice delivery drivers to turn up for work.

Mei Zhang, a 30-year-old cafe owner in Shenzhen, said delivering food and roasted coffee beans to her clients had become unusually challenging since restrictions were lifted. “Delivery men are mostly Covid-positive now,” said Ms. Zhang, who has been working around the clock after her entire staff contracted Covid following the policy change.

In the final three months of 2022, Chinese businesses borrowed more from nonbank lenders than at any time since China Beige Book, a research firm, first began tracking the figures in 2012—a potential sign they are struggling.

“When companies tap credit there is always the question of whether it is being done out of optimism or distress,” China Beige Book CEO

Leland Miller

said. “Here, the evidence for distress is overwhelming.”

Write to Dan Strumpf at Dan.Strumpf@wsj.com and Liza Lin at liza.lin@wsj.com

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