China's Lockdown Economic Effects

President Xi Jinping has made clear there will be no change to the Covid Zero policies the country has followed since locking down Wuhan in 2020, which means that a cycle of shutdowns and reopening is likely in cities across the nation for the rest of this year, and possibly even longer. Judged purely on public health grounds, China’s Covid Zero strategy has been a demonstrable success so far. Not only has it sharply curbed deaths compared with Western nations, but it also has allowed the country to concentrate its more limited the virus outbreak and stringent controls are now the biggest threat to China’s growth since the pandemic began two years ago.


Some cities in China including Shanghai, the "showpiece of the Chinese economy", and 16 other municipalities that account for 70% of China's GDP in the past weeks, have closed their doors once again, and concerns are rising due to the reoccurrence of the corona whammy. Most of Shanghai’s 25 million residents have been confined to their homes for more than a month. Nomura Holdings Inc. cut its forecast for China’s economic growth rate to 3.9% as the country’s insistence on sticking with Covid Zero disrupts the economy more severely than monetary policy can provide support. If realized, the 3.9% expansion rate for 2022 would mark China’s worst annual performance since 1990, excluding 2020 when the pandemic battered the economy and pushed the growth rate to 2.2%. Nomura also cut its growth forecast for the second quarter to 1.8% from 3.4%, though added a “much higher risk on the downside than on the upside” for that quarter and the second half of the year.


The lockdown has caused supply chain disruptions all over the world; ocean shipping delays in major European cities have more than doubled, US imports shortage in electronics, automotive, and semiconductors, along with several airfreights' cancelations. China accounts for about 12% of global trade and Covid restrictions have idled factories and warehouses, slowed truck deliveries, and exacerbated container logjams. The market is estimating a loss of around USD 46B/ month in output due to the lockdown in China. Tesla's factories in China have suspended operation, while other companies have had their employees spend their nights at the factories to avoid ceasing operations. The problem is urging companies to relocate outside China.


The National Bureau of Statistics has shown that China's factory activity has contracted in March with the Caixin China General Manufacturing PMI) falling to 48.1, which is the lowest in more than 2 years, in addition to output and exports falling at the fastest pace since the pandemic. However, it is expected that the PMI will rebound to reach 49.1 by the end of Q1 and not pass the 50-point mark before next year, according to Trading Economics global macro models. Small business confidence dropped to the lowest level in more than two years in April, according to Standard Chartered Plc’s survey of more than 500 smaller firms, mainly due to the impact of large-scale lockdowns. Business sentiment also weakened sharply, with the ‘expectations’ sub-index edging down to a 26-month low, the survey showed.


Consumers and private firms are also “worn out” after years of living through the pandemic, and may be forced to reduce spending due to drying-up savings, the economists said. Meantime, separate data on March activity showed retail sales fell 3.5% YoY, down for the 1st time since July 2020, and worse than market expectations. Analysts say that April data will likely weaken further, dragged down by strict restrictions in the financial hub of Shanghai.


The People’s Bank of China offered only a modest cash boost to the economy last week, reducing the reserve requirement ratio for banks by a smaller-than-expected 25 basis points. The People’s Bank of China kept the rate on its one-year policy loans at 2.85% on Friday. The PBOC also refrained from injecting extra liquidity into the financial system, opting instead to roll over the 150 billion yuan ($23.5 billion) of loans maturing in the medium-term lending facility. Economists had expected a net injection of 100 billion yuan. The government has made repeated promises over the past month that it would support markets, but the results have been disappointing.  Investors aren’t buying the government’s bullish rhetoric and promises of support for the economy. The benchmark CSI 300 Index has tumbled about 18% so far this year and remains in a bear market while bond yields have risen, underscoring concerns Beijing may not be doing enough to arrest slowing growth. Overseas investors offloaded 45 billion yuan ($7 billion) of stocks in March, the largest outflow in nearly two years, while global funds slashed their holdings of Chinese bonds by the most on record that month. The onshore yuan slumped to its weakest level in 17 months on concerns about rising capital outflows.




Shanghai Banxia Investment Management Center, which topped local rankings in 2020, has cut its stock exposure to zero in anticipation of a worsening economy and further declines in equities, founder Li Bei said. The fund, which manages more than 5 billion yuan ($785 million), has also closed almost all short positions in commodities after rising prices led to losses. DH Fund Management, a macro fund managing more than 10 billion yuan, apologized to investors and cut management fees this month after steep losses.


Nomura Bank said the PBOC may opt to cut interest rates in April or May, after it reduces the RRR, predicting a 10-basis point reduction in policy rates by the end of this year. The room for policy easing is limited, he said, due to the Federal Reserve’s rate hikes, the need to protect commercial banks’ profitability, and a worsening inflation outlook. China’s yield advantage over Treasuries disappeared for the first time in more than a decade earlier this week after overseas investors offloaded a record amount of Chinese sovereign bonds in March and trimmed holdings of mainland equities for the first time since September 2020.


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