Why China will probably recover more slowly from the latest Covid shock

As Shanghai businesses try to reopen, a suburban district weekend forbade residents to leave their apartment complex for re-testing. Here is a picture of a line outside a shopping mall in another district on May 21, 2022.

Xu Kaikiya | Visual China Group | Getty Images

BEIJING – China’s economy will not recover quickly from the recent Kovid outbreak, many economists predict.

Instead, they look forward to a slow recovery.

When the epidemic hit for the first time in 2020, China bounced back from a contraction in the first quarter to an increase in the second quarter. This year, the country has faced more contagious virus forms, weaker overall growth and less government stimulus.

The latest Kovid outbreak, which began in March, hit Shanghai hardest. About a week ago, the city announced plans to exit the lockdown – and reopen completely from mid-June.

“For China, the main story here is that we saw the light at the end of the tunnel. The worst supply chain displacement in China seems to have ended since the Cowid Lockdown, “said Robin Jing, chief China economist at Morgan Stanley, during a webinar on Friday.

“But we also think that the road to recovery will probably be slower and slower,” Jing said.

It’s a process of fit and start. Over the weekend, a suburb of Shanghai again banned residents from conducting mass virus tests from their apartment complexes. People in more parts of the capital, Beijing, have been instructed to work from home as the number of local daily cases has risen – reaching 83 on Sunday, the highest for the city’s latest outbreak.

Incident: German automaker Volkswagen, which has factories in two of the worst-hit areas this year, said on Wednesday that its Chinese manufacturing sites were up and running, but that Covid was disrupting control supply chains.

The automaker said it was unable to provide accurate statistics on production levels as the factories were run jointly with local partners.

Although the number of National Cowid cases has dropped in the past month, new case pockets from Beijing to southwest China have prompted orders to stay home and conduct mass trials. Freight volume is below normal.

Meng Lei, a China equity strategist at UBS Securities, said in a note last week that “many regions and cities have imposed restrictions at the first sign on local issues.”

“Our case studies in Shanghai, Jilin, Xian and Beijing show that logistical and supply chain disruptions are the biggest pain points affecting production recovery,” Meng said. “So work recovery can happen slowly rather than overnight.”

A policy cycle ‘disrupted’

Despite the emergence of highly transmissible Omicron variants this year, the Chinese government has stuck to its strict policy of “dynamic zero-covid”.

The “most significant effect” of the Kovid revival was that it “disrupted” the normal policy-making schedule, said Dan Wang, chief economist at Shanghai-based Hang Seng Bank in China.

He said the latest wave of lawsuits and lockdowns began shortly after the central government unveiled its annual economic plan in a “two-session” parliamentary session in March.

In China’s widely managed economy, this annual meeting is an important part of a cycle to develop and implement national policies across departments and regions.

The supply chain is disrupted and inadequate costs are manageable, but once policy schedules are disrupted, “it’s hard to get back on track quickly,” Wang said.

There are so many different economic goals that “there is a lot of compromise between different ones [government] “This has made the policy process extremely slow and lagging behind,” he said.

China’s State Council Information Office, the country’s top executive, did not immediately respond to CNBC’s request for comment.

Officials have a special weight of politics this year before the regular change of leaders scheduled for fall. Chinese President Xi Jinping is expected to run for an unprecedented third term.

Half the stimulus as of 2020

In the “two sessions” in early March, Beijing set targets such as GDP growth to be “about 5.5%”. However, this is about 1 percent or more of the forecast of many investment banks – who have repeatedly lowered their growth forecasts for China as the cowardly lockdown continues.

Wang maintains a relatively high forecast of 5.1% as he expects China to increase stimulus after the summer and ease tight curb control.

So far, however, almost two months after Shanghai was cordially locked down, policymakers have yet to make major changes.

In terms of interest rates or fiscal policy, the level of government stimulus is still about half of what it was at the height of the epidemic in 2020, says Morgan Stanley Jing.

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With the exception of unemployment, most economic indicators have not reached worse levels than in early 2020.

Among other measures, the central government has announced tax and fee reductions for small businesses and has begun to reduce mortgage rates. But the impact, especially on the huge real estate sector, could take time to play out.

Jing noted that in addition to Kovid, it would take three to six months for the property market to simplify policies to influence home buying activity.

Rumors in other parts of China

However, it is also possible that growth in China may come faster than many expect.

“Silver Lining Hall’s experience over the past two years suggests that a cowardly-induced recession tends to end quickly, especially with immediate and strong policy responses,” Larry Hu, McCurry’s chief China economist, said in a note last week.

In most cases in China, work is underway, even if additional virus testing is required.

About 80% of production in South China has returned to normal. Although the region’s largest city, Shenzhen, closed almost all businesses for about a week in March, moving goods by truck within a province is “OK.” Klaus Jenkel, chair of the South China chapter of the EU Chamber of Commerce in China, told CNBC on Friday that the number of cove cases in the region is very low.

Members from southern Guangdong province – a manufacturing hub – said “everyone is busy, they all have work to do,” Jenkel said. He noted that businesses are keeping their warehouses full to prevent long-term deficit problems.

But “there is uncertainty,” he said. “You never know what will happen.”

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