China’s Zero-COVID Policy: The Economic Impact

China took a different path in response to the global outbreak of COVID-19, pursuing a policy of zero tolerance for COVID infections, which meant meeting any signs of virus infection with lockdowns and isolation to prevent its spread. While the approach seemed to work well early on, China has been undergoing rolling lockdowns throughout the country, including port cities.  The economic impact has been significant.

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    China’s Zero-COVID Policy: The Economic Impact

    China’s Zero-COVID Policy: The Economic Impact

    China took a different path in response to the global outbreak of COVID-19, pursuing a zero-COVID policy, which meant zero tolerance for COVID infections, which resulted in any signs of virus infection with lockdowns and isolation to prevent its spread.

    Early on the approach seemed to work very well, as China’s infection numbers were low in relation to most western countries. That is, until the Omicron variant, which has led to wide economic lockdowns and growing public frustration with China’s zero-COVID policy.

    China’s Economy Buckles

    While the Omicron-triggered lockdowns in Shanghai and Beijing received most of the press’s attention, China has been undergoing rolling lockdowns throughout the country, including port cities.

    The economic impact has been significant.

    China’s industrial production seized up in April, falling by over 7% from the previous month and by 2.9% versus April 2021. Retail sales declined 14% from a year ago, while car sales plunged over 30% (nearly zero car sales in Shanghai—a city of over 26 million people).1

    China’s property market—which has been stressed by excessive debt loads as a result of overbuilding—saw massive erosion, as evidenced by a 42% decline in new home sales and a 44% decline in housing starts.2

    Unemployment crept up to near peak levels (6.1%), reaching 6.7% in the nation’s 31 largest cities.3

    One potentially long-lasting impact is on the millions of small businesses that were required to close, many of which may not have the capital to survive an extended shutdown period. If these businesses don’t come back, it could result in millions of unemployed workers.

    The recent shutdowns have led to downward revisions from many economic watchers, from Fitch Ratings (2022 GDP cut from 4.8% to 4.4%) and American investment banks (consensus lowered to 4.5%, well below China’s official projection of a 5.5% increase) to the IMF (lowered to 4.4% from 4.8%).4,5,6

    Though Shanghai and Beijing have begun reopening, the economic threat of COVID-19 remains a significant one as long as China remains committed to its zero-COVID policy.

    What to Expect

    In a research report by J.P. Morgan, China’s growth prospects were framed around how these key questions get answered:

    1. Is China’s housing market at risk?
    2. What will China’s inflation rate be in 2022?
    3. Will China keep in place its zero-COVID policy?
    4. Will the U.S.-China relationship improve?

    The answers will matter as China’s economic performance is likely to impact economies across the world, including the U.S.

    Sources:

    1. https://www.economist.com/finance-and-economics/2022/05/19/even-chinas-official-economic-figures-look-bleak
    2. https://www.economist.com/finance-and-economics/2022/05/19/even-chinas-official-economic-figures-look-bleak
    3. https://www.economist.com/finance-and-economics/2022/05/19/even-chinas-official-economic-figures-look-bleak
    4. https://www.fitchratings.com/research/sovereigns/china-2022-growth-forecast-cut-amid-covid-19-outbreaks-03-05-2022
    5. https://www.cnbc.com/2022/04/26/investment-banks-slash-china-growth-outlook-one-puts-gdp-below-4percent.html
    6. https://www.wsj.com/articles/imf-cuts-china-growth-forecast-to-4-4-11650373201

     

    Please reference disclosures: https://blog.americanportfolios.com/disclosures/

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