Doing Business in and with China During COVID Lockdowns

The following four things in the last 24 hours have “compelled” me to write this post.

One, a client yesterday asked me to explain China’s current COVID quarantine rules for incoming travelers. My response was that I had no idea what those rules were because he was the first person to ask me in months. I then proceeded to say that my only knowledge about those rules was mostly anecdotal as it comes from people complaining about them on social media and a Chinese lawyer friend with whom I talk every few months.

I then said that all of these people HAD to return to China for personal/family reasons and what they were saying was that it was awful. One person told me that he had been in a hotel for a month, but he knew that would happen and so he prepared. He also was able to stay in a nice hotel. This person then told me that China’s “dirty little secret is the number of young people who have committed suicide while in quarantine or under lockdown.”

We then spitballed as to how his company could achieve what it wanted to achieve in China without anyone going there. I often have this sort of conversation with clients.

Two, A couple weeks ago, in Private Equity Deals Involving China Assets: Due Diligence and Normal Noncompliance, we wrote about how our law firm is getting called on to conduct international due diligence (oftentimes China) on domestic private equity deals. In most of these instances, our China due diligence consists of a combination of reviewing documents provided by the relevant Chinese company, talking with Chinese company personnel, and investigating the Chinese company on the Chinese internet and via relevant Chinese language databases — many of which are Chinese government databases.

Sometimes, however, due diligence mandates that someone look at a facility or something else in China. In those instances, our China on-the-ground connections become critical. We typically request a trusted ally in China do the physical review and who we know and where they are becomes critical. Getting someone you know in Beijing to go to Shenzhen might be fabulously expensive simply because that person is unlikely to risk the possibility of being caught in a one month Shenzhen lockdown for small money.

What this has usually meant is that if we need a factory in Qingdao evaluated and our usual best person for this is in Shenzhen, we nonetheless use someone in Qingdao. The importance of knowing good people in many Chinese cities has gone way up. We do not claim to have amazing contacts in every Chinese city, but we do claim to have sufficient contacts that we so far have been able to find a good person in every instance.

In the last 24 hours, my law firm took on a new matter that will almost certainly require a very high level factory inspection — fortunately, in a major Chinese industrial city.

Three, Sofeast (a top tier Shenzhen-based China sourcing and quality control company) just this morning came out with a long and depressing, but ultimately incredibly helpful post on dealing with China’s labyrinthian system of COVID testing and lockdowns. The article is Travel To China In 2022 – Don’t Test Positive! and though I found it too depressing to read the entire thing, I urge everyone to read the entire thing. This is its first paragraph:

One of our management team based in our Shenzhen office visited her family in Europe and flew back to China recently. Many foreign importers with a supply chain there are eager to travel to China in 2022, but even if it is possible for employees and business travellers to come in and do 10 days of quarantine, it is far from a straightforward experience…she was also unlucky enough to test positive on her return to China, and it’s at this point that things started to go very wrong. . . .

Let the nightmare begin. . . .

Four, the Financial Times yesterday came out with a bombshell article in which even a “top executive at one of China’s most prominent biotech companies” is quoted as saying it is “mind-boggling that Beijing had not allowed sales of Covid-19 vaccines using technology pioneered by Moderna and BioNTech/Pfizer.”

To grossly summarize the rest of the article, the CCP has CHOSEN lockdowns over vaccines that actually work.

Way back in December, in Omicron and Supply Chains: Buckle Up, I emphatically predicted that China would do a terrible job with Omicron and that foreign companies that manufacture in China (either themselves or via outsourced Chinese manufacturers) would suffer. The below is from that post:

Omicron will cause more manufacturing to leave China

Omicron is incredibly contagious and China is not well-equipped to slow it down to the same extent it has done with previous COVID variants. Omicron will likely lead to massive shutdowns of China’s factories and, in turn, convince more foreign product buying companies to diversify out of China.

Unlike the Pfizer and Moderna vaccines, China’s vaccines do not prevent the spread of Omicron. I repeat, China’s vaccines do not prevent Omicron infection, though they do appear to work fairly well at moderating the impact of any infection. When I tell this to clients and friends in China, their initial response is that China has never relied much on vaccines to slow COVID’s spread; it has relied mostly on testing, quarantining, and shutdowns/lockdowns. They are right and this is why I am so worried about China factory production.

Atlantic Magazine science reporter Katherine Wu (one of my go-to sources on everything COVID) yesterday came out with How Long Does Omicron Take to Make You Sick? Ms. Wu’s article was subtitled “The new variant seems to be our quickest one yet. That makes it harder to catch with the tests we have.”

The article discusses how testing will be less effective at preventing Omicron’s spread because Omicron becomes contagious much faster than previous COVID variants. By the time people test positive for Omicron, they likely will have already spread the virus to many. Ms. Wu uses a wedding in Oslo, Norway, at which 80 guests caught Omicron, as an example:

In a research paper describing the Oslo outbreak, scientists noted that, after the event, symptoms seemed to come on quickly—typically in about three days. More troubling, nearly every person who reported catching Omicron said that they were vaccinated, and had received a negative antigen-test result sometime in the two days prior to the party. It was a clue that perhaps the microbe had multiplied inside of people so briskly that rapid-test results had rapidly been rendered obsolete.

Ms. Wu then explains in considerable detail why Omicron will render tests so much less effective in slowing its spread:

The picture on Omicron is coalescing both microscopically within us and broadly in communities—steep, steep, steep slopes in growth. The two phenomena are linked: A shorter incubation period means there’s less time to pinpoint an infection before it becomes infectious. With Omicron, people who think they’ve been exposed may need to test themselves sooner, and more often, to catch a virus on the upswing. And the negative results they get might have even less longevity than they did with other variants, Melissa Miller, a clinical microbiologist at UNC, told me. Tests offer just a snapshot of the past, not a forecast of the future; a fast-replicating virus can go from not detectable to very, very detectable in a matter of hours—morning to evening, negatives may not hold.

This, especially, could be bad news for PCR tests, which have been the gold standard throughout the pandemic and essential for diagnosing the very sick. (Thankfully, most PCR tests do seem to be detecting Omicron well.) These tests have to be processed in a laboratory before they can ping back results—a process that usually takes at least a few hours but, when resources are stretched thin as they are now, can balloon to many days. In that time, Omicron could have hopped out of one person’s body and into the next, and into the next.

China’s vaccines will not slow the spread of Omicron and its tests will be rendered relatively ineffective as well. This essentially means one of two things will happen. Omicron will spread through China much as it is already doing in Africa, Europe, and the United States, or China will require lockdowns, shutdowns and quarantines to prevent that. Based on how China has reacted to COVID so far, I expect it will mandate lockdowns, shutdowns, and quarantines to try to slow Omicron’s spread. These lockdowns, shutdowns, and quarantines will close China factories and ports and lead to another massive supply chain crunch. 

I fervently hope I am wrong on the above and that China and the world somehow defeat Omicron before it spreads pretty much everywhere. And even if that is not possible, I fervently hope against a new supply chain crunch. But though my heart desperately wants everything to go well, my head is telling me not to be optimistic, and certainly not to count on this. Like CNN’s Michael Smercomish, I am increasingly resigned to catching Omicron, which is something I would not have said as recently as a week ago. I am also increasingly resigned to a renewed supply chain crunch.

I concluded this post by discussing why and how companies need to reduce their China footprint and I intend to write an in-depth post on exactly that within the next week or so. Intend to write such a post because lightening one’s footprint in China is THE big issue for most companies doing business in and/or with China.

I mention the FT article and my December post because I am more convinced than ever that the CCP does NOT want to ameliorate COVID’s impact on China because doing so would diminish its incredible power and control over its people. And I’m also more convinced than ever that COVID in China — more accurately, the CCP’s handling of COVID — will negatively impact foreign companies there for a long, long time.

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