China’s zero Covid strategy hurts consumer spending more than manufacturing

Residents line up for Covid-19 mass testing on January 9, 2022, in Tianjin, after the municipality reported 20 new cases over the weekend.

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BEIJING – China’s zero Covid policy to control the pandemic affects consumers more than factories, economists say.

As local authorities impose more travel restrictions and a few blockages to contain the omicron Covid variant, analysts are becoming cautious of the Chinese economy. Goldman Sachs lowered its growth forecast for the year on Tuesday.

But analysts focused on the impact on China’s already weak consumer spending.

Omicron’s high transmissibility means the costs of China’s zero Covid policy are increasing, while the benefits are decreasing, Nomura’s chief economist for China, Ting Lu, said in a report on Monday. He noted that in the hospitality industry, business had not yet returned to pre-pandemic levels and workers in the industry could use up their savings and spend less.

Manufacturing was not on the cost list.

On the positive side, “the zero Covid strategy, along with Beijing’s ability to mobilize all of the country’s resources, has arguably brought significant benefits to its people and to its economy, with an official death toll of just four since mid-April 2020, factories pulling all cylinders, and an impressive 31.0% [year-on-year] export growth in the first eleven months of the year, ”said Lu de Nomura.

Since the pandemic began in early 2020, China’s policy has used quarantines and travel restrictions – whether within a city or with other countries – to control outbreaks. After a contraction in the first quarter, the country became the only major economy to grow that year.

The biggest impact of the zero Covid policy has been on hotels and restaurants, according to analysis by Dan Wang, Shanghai-based chief economist at Hang Seng China. Manufacturing and agriculture were the least affected and contributed the most to growth, according to its study.

Wang’s analysis compared GDP figures in 2020 and 2021 to a four-year average of China’s annual GDP growth rate between 2016 and 2019, before the pandemic.

“By containing the spread of the Covid, China [has] been able to ensure that all nodes in the supply chain were functioning so that agricultural and industrial production (…)

Industrial production rose 2.8% in 2020 and 10.1% in the first 11 months of 2021 compared to the same period a year ago. Activity at Chinese factories rose unexpectedly in December, according to an official metric called the Purchasing Managers Index.

Why factories are less affected

Although the Chinese economy faces a number of challenges, ranging from soaring commodity prices to a crackdown on the massive real estate sector, economic data points to a resilience of factory production.

In China, manufacturers are less affected by city closures since factories are typically located in suburban industrial parks, where employees live in dormitories, said Yue Su, senior economist at The Economist Intelligence Unit.

She noted how Apple supplier Foxconn was able to keep production going at its factory in Zhengzhou, Henan, last summer despite historic flooding that killed more than 300 people in the province.

Su expects different approaches from local governments to implement a zero Covid policy will result in varying economic performance by province this year.

“For example in Shanghai, when there is a positive case, they only lock the neighborhood or the street,” she said. “But for governments with limited health resources[s], they tend to lock down the whole city immediately, like what happened in Xi’an. “

Xi’an, in central China, is one of the country’s many industrial hubs. The lockdown since the end of December of a city of 13 million people has contributed to forecasts by Citi chief economist in China, Li-Gang Liu, that industrial production could fall to 3.5% year-on-year in December, against 3.8% in November.

But Liu expects China’s trade growth to “remain robust” despite a strong base in the past two years.

More than half of Chinese products manufactured for export come from the provinces of Guangdong, Jiangsu and Zhejiang, on the south or southeast coast near Shanghai. The least developed regions are in the central and western parts of China, a country of 1.4 billion people.

Chinese export growth remained resilient throughout 2021, despite multiple warnings of slowing foreign demand.

The risk this time around is that factories in other countries could operate if their governments decide to pursue a strategy of coexistence with the Covid.

China’s “zero Covid policy can on the one hand ensure retail activity, industrial activity can continue, but if the world is successful in the way of” living with [the] virus, “China may risk the growth divergence between the two,” said Gary Ng, Asia-Pacific economist at Natixis.

Political risks

Analysts expect China to stick to zero Covid policy until the end of this year due to politically significant events, from the Beijing Winter Olympics in February to a leaders’ meeting of the Chinese Communist Party expected in the fall.

It adds pressure on local government leaders, who are often sacked after a wave of Covid cases in their city.

Strict politics has become politically sensitive in other respects. On January 3, US-based consulting firm Eurasia Group named the top risk for 2022 as China’s failure to reach zero Covid, requiring tougher lockdowns and exacerbating disruption in the supply chain. ‘supply. Chinese state media were quick to criticize the report with opinion pieces in English and a cartoon.

Authorities are also concerned about the country’s already limited hospital capacity.

The China Center for Disease Control and Prevention released a study in November that said switching to the coexistence strategy of other countries would likely result in hundreds of thousands of new cases daily and devastate the national medical system.

Learn more about China from CNBC Pro

The omicron Covid variant that emerged in late November is a highly mutated version of the coronavirus that is highly transmissible.

Early reports indicate that omicron may be less lethal than other strains of Covid. But the World Health Organization said on Tuesday that omicron can cause fatal disease for unvaccinated people, the elderly and those with underlying conditions.

Mainland China reported 124 new locally transmitted cases on Wednesday, for a total of 3,460 existing cases – and no new deaths. New cases in Xi’an City fell to six, from 63 a week earlier. In the United States, deaths from Covid are on average 1,700 per day, while hospitalizations reached a record 132,646 people on Monday, according to Reuters.

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