China’s anti-coronavirus strategy hurts consumer spending more than manufacturing

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

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BEIJING – China’s no-coronavirus policy to control the epidemic is affecting consumers more than factories, economists say.

With local authorities imposing more travel restrictions and fewer lockdowns to contain the omicron Covid variant, analysts are turning to caution about the Chinese economy. Goldman Sachs on Tuesday cut its growth forecast for the year.

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

Nomura’s chief Chinese economist, Ting Lu, said in a report on Monday that Omicron’s high transmissibility means that the costs of China’s policy of non-proliferation of the novel coronavirus are rising, while the benefits are declining. He noted that in hospitality, business still has to recover to pre-pandemic levels, and industry workers may be draining their savings and spending less.

Manufacturing was not on the list of costs.

On the positive side, it can be said that “the zero-Covid strategy, in addition to Beijing’s ability to mobilize all of the country’s resources, has brought great benefits to its people and economy, with the official death toll at only four since mid-April 2020, and factories in flames. All cylinders, an impressive 31.0 % [year-on-year] Export growth in the first eleven months of the year.

Since the epidemic began in early 2020, China’s policy has used quarantines and travel restrictions – both within a city and with other countries – to control the outbreak. After contracting in the first quarter, the country became the only major economy that grew that year.

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

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

“Containing the spread of Covid, China [has] I was able to make sure that all the nodes along the supply chain are operating so that agricultural and industrial output is actually… above trend value,” she said in a phone interview last week.

Industrial production grew by 2.8% in 2020 and rose by 10.1% in the first 11 months of 2021 compared to the same period last year. Factory activity in China increased unexpectedly in December, according to an official gauge called the Purchasing Manager’s Index.

Why factories are less affected

Although the Chinese economy faces a number of challenges from rising commodity prices to suppressing the huge real estate industry, economic data indicates resilience in factory production.

Yu Su, chief economist at The Economist Intelligence Unit, said manufacturers in China are less affected by city shutdowns as factories are usually dotted in suburban industrial parks, where employees live in dormitories.

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

Su expects that the different methods of the local government to implement the zero-Covid-19 policy will lead to uneven economic performance by province this year.

“For example in Shanghai, when there is a positive case, they will only close the area or the street,” she said. “But for governments with limited healthcare resources[s]They tend to shut down the entire city right away, like what happened in Xi’an.”

Xi’an located in central China is one of the country’s many industrial centers. The shutdown of a city of 13 million people since late December has contributed to a forecast by City’s chief China economist Li Gangliu that industrial production could fall to 3.5% year-on-year in December, from 3.8% in November.

But Liu expects Chinese trade growth to remain “robust” despite the high base of the past two years.

More than half of China’s manufactured goods for export come from the provinces of Guangdong, Jiangsu and Zhejiang on the south or southeast coast near Shanghai. The least developed regions are located 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 demand from abroad.

The danger is this time, factories in other countries may be able to operate if their governments decide to follow the strategy of living with Covid.

China’s “Covid-free” policy can ensure retail activity, and industrial activity can continue, but if the world is successful in the way of “living with [the] With the virus, Gary Ng, an Asia-Pacific economist at Natixis, said, “China could risk a growth divergence between the two.”

political risk

Analysts expect China to stick to a zero-Covid policy until the end of this year due to events of political significance, from the Beijing Winter Olympics in February to the CPC leadership meeting expected in the fall.

This is adding pressure on local government leaders, who are often fired after an increase in Covid cases in their city.

Strict politics has become politically sensitive in other ways. US-based consulting firm Eurasia Group announced Jan. 3 that the biggest risk for 2022 is China’s failure to achieve zero COVID-19, which will require more severe shutdowns and increase supply chain disruptions. Chinese state media quickly criticized the report with English-language opinion articles and a cartoon.

The authorities are also concerned about the already limited hospital capacity in the country.

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

Read 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.

Preliminary reports indicate that Omicron may be less lethal than other strains of Covid. But the World Health Organization said Tuesday that Omicron could lead to a life-threatening illness for the unvaccinated, the elderly and people with underlying conditions.

Mainland China reported 124 new locally transmitted cases on Wednesday, for a total of 3,460 current cases — and no new deaths. And new cases of infection in the city of Xi’an fell to six, compared to 63 in the previous week. In the United States, the average number of deaths from Covid-19 per day was 1,700, while the number of hospitalizations was 132,646 people as of Monday, according to Reuters.

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