What we know about the economic impact of China’s Covid spike

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A man holds up a child to a window on a tent to get tested for Covid-19 in Changchun city, northeast China’s Jilin province, on March 15, 2022.

Future Publishing | Future Publishing | Getty Images

BEIJING — China’s latest Covid-19 outbreak could hit first-quarter gross domestic product by at least half of a percentage point, Citi analysts predicted in a report Tuesday.

In the last few days, mainland China has seen its worst Covid outbreak since the initial height of the pandemic in early 2020 — when the economy contracted. The latest surge in cases, which stems from the highly transmissible omicron variant, has forced some manufacturing hubs across the country to suspend or limit production.

The most affected regions account for 16.7% of national GDP, according to Citi estimates.

“Economic loss may be real this time,” the analysts said. “Jointly considering the spillover effect to other regions, we think the lockdown and tightened quarantine measures this round could potentially deduct ~0.5-0.8 ppt of GDP growth in Q1, assuming no policy responses.”

Mainland China reported 1,860 confirmed Covid cases for Tuesday, down from more than 3,500 new cases a day earlier. The country has not reported new deaths, and the number of new cases is still far lower than in other parts of the world, such as Europe.

Beijing’s zero-Covid policy measures have prompted analysts to issue reports about growing risks of drags on the world’s second-largest economy, even if few are able to put a number on it yet.

Uneven picture

“We believe the omicron wave presents both risks and opportunities for China,” Bank of America Securities’ China equity strategy team said in a report Tuesday.

If the pandemic is managed well, the analysts said, the outbreaks could help China prepare to reopen its borders. But if not, they said the omicron wave “could cause significant downside to China’s GDP growth and disruption to the global supply chains in the near term, and potentially accelerate the decoupling and supply chain relocation in the medium term.”

So far, the analysts’ research and checks with local factories reveal limited impact on the production of chips, autos, apparel and beer, among other industries. The Android smartphone supply chain could be among the harder-hit, the report said. But, like other industries, production could be shifted to other locations.

For autos, the analysts said that “according to channel checks, a couple of Shanghai-based names saw bigger disruption, while BYD’s Shenzhen plant is operating normally as of 14th March.”

BYD did not immediately respond to a CNBC request for comment.

We have been notified that all ports and terminals in Shenzhen (Yantian and Chiwan) are currently working as normal.

The lockdown and production suspension measures announced by Shenzhen and Dongguan — two manufacturing hubs in the export-heavy province of Guangdong — will last only about a week.

Economic data for January and February reported on Tuesday came in well above expectations, and the National Bureau of Statistics spokesperson said the impact of the virus would mostly be at a local level.

“March may be a different picture depending on how long the restrictions in Shenzhen and Jilin last for,” said Francoise Huang, senior economist at Euler Hermes, a subsidiary of Allianz. “If it just lasts for one or two weeks, it might become a blip in the data.”

The latest Covid wave has hit the northern Chinese province of Jilin the hardest, with the region accounting for the majority of daily new cases. The province banned travel to other parts of China on Monday, and is building emergency hospitals.

Although Jilin’s capital of Changchun is an auto manufacturing center, contribution to China’s GDP is 0.65%, less than Dongguan’s 0.95% and Shenzhen’s 2.73% share, according to Citi.

Targeted zero-Covid policy

Read more about China from CNBC Pro

If recent lockdowns persist, the “economic pain” could last past the first quarter into the early part of the second, a Moody’s Analytics report said Tuesday.

Can lockdowns still work?

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