China’s covid lockdowns could threaten half the economy

Widespread shutdowns in China, similar to the measures just taken in the southern technology hub of Shenzhen, could affect half of the country’s gross domestic product.

Authorities on Sunday placed Shenzhen’s 17.5 million residents under quarantine for at least a week amid a surge in Covid-19 infections in the city, a move that Bloomberg Economics says will carry a ” direct blow” to the province of Guangdong, which represents 11% of GDP.

As cases jump elsewhere, half of China’s GDP and population will be affected by the latest outbreak, according to economists at Australia & New Zealand Banking Group Ltd.

Bloomberg

“Previous steps to contain virus outbreaks have left manufacturing mostly unscathed,” Chang Shu and David Qu of Bloomberg Economics wrote in a note on Monday. The lockdown in Shenzhen will affect production in industries such as technology and machinery, which fuel global supply chains, they said.

“The double hit to consumption and production, as well as spillovers beyond China, raise the stakes of this lockdown,” the economists added.

Shenzhen’s decision comes as other parts of China try to combat the rapid spread of the coronavirus. Shanghai suspended in-person classes and shut down intercity bus services, while the northeast industrial hub of Changchun, Jilin – a city of around 9 million people and accounting for around 11% of total annual output cars in China in 2020 – was locked last week.

“More cities could follow Shenzhen’s practice,” Raymond Yeung, chief economist for Greater China at ANZ, said in a note on Monday, noting the city’s decision to close public transport and prevent people to go out or come in. “If the lockdown is prolonged, China’s economic growth will be significantly affected.”

While Yeung said ANZ was not revising its 2022 guidance yet, they were “wary” of further restrictions. ANZ expects GDP growth of 5% for the year, less than the government’s target of around 5.5%.

If key provinces along the coast and northeast followed Shenzhen’s lead and locked down for a week, the economic cost could amount to 0.8 percentage points of GDP growth, Yeung said.

Nomura Holdings Inc. said the economic costs of China’s Covid Zero approach are high and market participants may be overly optimistic about this year’s growth prospects. The bank expects GDP growth of 4.3%, well below economists’ consensus forecast of 5.2%.

China is facing fast-spreading clusters spawned by the highly infectious omicron variant. New daily cases rose to more than 3,300 on Saturday from just over 300 a week ago. The outbreak poses an unprecedented challenge to the country’s Covid Zero strategy, which has so far protected its large industrial sector but dampened consumption.

Foxconn Shutdown

Shenzhen is home to the headquarters of tech giants like Tencent Holdings Ltd. and Huawei Technologies Co. Apple Inc. supplier Foxconn, the Taiwanese company also known as Hon Hai Precision Industry, which is headquartered in China in the region. The company halted operations in Shenzhen, including at a site that produces iPhones, in response to the lockdown.

Bloomberg

Major financial companies, including Ping An Insurance Group Co. and China Merchants Bank Co., also have their headquarters in the city. And several foreign banks like UBS Group AG and HSBC Holding have opened branches in the region.

Brokers and major state banks in the city suspended in-person services after the lockdown, according to notices and local media.

Shenzhen is China’s second most important port after Shanghai and handles around 10% of the containers shipped from China each month. Part of the port was closed for weeks in mid-2021 to contain a local Covid outbreak, but even then the port was able to ship nearly 2 million containers in June 2021.

Yantian Port said in a statement on Monday that it was operating normally after Shenzhen tightened virus checks.

Guangdong’s $795 billion in exports in 2021 accounted for 23% of China’s shipments that year, the most of any province, according to Bloomberg Economics. Shenzhen alone had exports of $303 billion.

“Even if the lockdown is only in place for a short period – our base case – the impact is likely to last a few more weeks due to likely supply disruptions in the city and repercussions beyond,” said the economists.

Although Covid Zero has not caused major economic disruption so far, the restrictions make the economy “particularly vulnerable to the more contagious omicron variant”, said Louis Kuijs, chief economist for Asia-Pacific at S&P Global Ratings.

“Overall, the economic impact of Covid is diminishing as governments ease restrictions and many move towards a ‘living with Covid’ approach,” Kuijs added. “However, for China, omicron is a major risk to domestic demand, production, and possibly supply chains.”

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