Hong Kong CNN Business  — 

Chinese officials are grappling with the economic distress caused by their Covid-19 restrictions, as several cities remain in lockdown, according to the head of a European trade group.

Jörg Wuttke, president of the European Union Chamber of Commerce in China, said in an interview with CNN Business on Thursday that his latest conversations with the government had been encouraging as pressure built on Beijing to ease up on measures that have stifled economic activity and kept millions of people at home.

“They are painfully aware of the damage to the economy. They’re worried about unemployment. They’re worried about foreign companies putting money elsewhere,” he added, citing a private meeting with a Chinese ministry. He declined to name the agency.

China is the world’s last major country still adopting a “zero Covid” policy, which aims to stamp out any sign of the virus through stringent quarantine and mobility restrictions.

This week, Chinese President Xi Jinping appeared to double down on that approach.

“We must put people and lives first, prevent imported cases and domestic flare-ups, conduct a scientific, precise and dynamic zero policy, and implement all measures to prevent and control” the pandemic, Xi was quoted as saying Wednesday by state-run news outlet Xinhua.

However, the Chinese leader acknowledged that the country should take measures to minimize the impact “on economic and social development.”

Economic fallout

Analysts have warned of the policy’s adverse effects on the world’s second largest economy.

Last week, the World Bank slashed China’s growth forecast, estimating that Chinese GDP would grow at 5% this year, sharply down from last year’s 8.1%. That’s also lower than the country’s official target of about 5.5%.

“After a promising start to the year, China’s economy is now facing its worst disruption since the beginning of the pandemic,” Carol Liao, China Economist at PIMCO, wrote in a note Wednesday.

She added that the impact on growth would ultimately depend on the length of ongoing restrictions.

Since last month, full or partial lockdowns have been implemented in about 45 cities, according to estimates by Nomura. Those cities have around 373 million residents combined, accounting for a quarter of the population and about 40% of the economy.

The situation has led to high levels of mental stress. In Shanghai, for example, where a massive lockdown has dragged on for weeks, residents have reported a lack of access to food and basic necessities since authorities decided to extend stay-home measures indefinitely.

In a widely publicized letter this week, the European chamber wrote to China’s State Council and Vice Premier Hu Chunhua calling for the government to shift away from the “zero Covid” approach and toward Singapore’s “living with Covid” model.

Wuttke said that officials took the recommendation surprisingly “well,” and appeared open to further discussion. “They see the damage it does,” he added.

Eric Zheng, president of the American Chamber of Commerce in Shanghai, said that his current sense was that “the government is not prepared to change its stance on this.”

Zheng views it as “more productive” instead for his organization to stay out of the increasingly politicized debate and focus on more pressing practical matters, such as helping companies try to maintain operations. With the restrictions, logistical matters that had once seemed simple, such as transporting goods from a factory to an airport, had become complex, he noted.

“In a lockdown situation, how do you continue your operations in terms of production, and … all the challenges with supply chains?” he said in an interview. “That’s the number one challenge for US companies.”

Expat exodus

But for some, it may already be too late.

Wuttke estimates that China has already lost 50% of all European expats since the pandemic started.

And there could be another exodus of families this summer when the school year ends, according to Wuttke. “I wouldn’t be surprised if another half of [those remaining] leave,” he said. “It really depends.”

As other nations continue to reopen, some foreign companies may also consider moving their regional headquarters out of China, he added. “I definitely see discussions,” said Wuttke.

Among those leaving are diplomats. On Monday, the US State Department said it had “ordered” the departure of non-emergency employees and their families from Shanghai, citing “a surge in Covid-19 cases and the impact of restrictions related to [China’s] response.”

The notice came just days after the United States had authorized the “voluntary departure” of staff from the city.

In Shanghai, “the mood is really dark,” said Wuttke. “Everyone knows that 2022 is going to suck.”

The executive noted that while the international spotlight largely remained on the financial hub, many people throughout the nation had also been struggling.

“I think the situation is much worse in Changchun and Jilin and Shenyang,” he said, referring to other parts of the country that have endured longer lockdowns than Shanghai.

“These people are equally eager to leave and cannot.”

– CNN’s Beijing bureau and Laura He contributed to this report.