What We Know About the Economic Impact of China’s Covid Spike-Reuters

A man holding a child in a tent window to be tested for Covid-19 in Changchun, Jilin Province, northeastern China on March 15, 2022.

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Beijing — China’s latest Covid-19 outbreak could hit GDP in the first quarter by at least 0.5 percent, Citi analysts predicted in a report Tuesday.

Over the past few days, mainland China has seen the worst Covid outbreaks since the first peak of the pandemic in early 2020, when the economy shrank. The recent surge due to the highly contagious variant of Omicron has forced some manufacturing centers across the country to suspend or limit production.

Citi estimates that the most affected areas account for 16.7% of GDP.

“This economic loss may be a reality,” analysts said. “Together with the spillover effects to other regions, the blockade and enhanced quarantine measures in this cycle will deduct approximately 0.5-0.8 percentage points from GDP growth in the first quarter, assuming no political reaction. I think there is a possibility. »»

Mainland China reported 1,860 confirmed Covid cases on Tuesday, up from more than 3,500 new cases the day before. The country has not reported new deaths and the number of new cases is much lower than in other parts of the world, such as Europe.

Beijing’s Zero-COVID policy action has led analysts to publish a report on the increased downside risk to the world’s second-largest economy.

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“We believe the wave of Omicron brings both risks and opportunities to China,” Bank of America Securities’ China Equity Strategy Team said in a report Tuesday.

According to analysts, if the pandemic is handled well, the outbreak could help China prepare to reopen its borders. But if not, Omicron wave said, “In the short term, it could lead to a significant decline in China’s GDP growth and disruption of the global supply chain, accelerating supply chain separation and relocation.” .. Medium-term supply.

So far, analyst surveys and surveys at local factories have shown that the impact on industries such as potato chips, automobiles, clothing and beer is limited. According to the report, the supply chain of Android smartphones can be the hardest hit. But like any other industry, production can be moved elsewhere.

In the case of cars, analysts said, “According to Channel Check, some Shanghai-based names are experiencing greater confusion, but BYD’s Shenzhen plant has been operating normally since March 14.” Said.

BYD did not immediately respond to CNBC’s request for comment.

All ports and terminals in Shenzhen (salt pans and Zhuang) are currently operating normally.

The blockade and suspension of production measures announced by Shenzhen and Dongguan, two high-export manufacturing bases in Guangdong, will last only about a week.

Economic data for January and February released on Tuesday far exceeded expectations, and a spokesman for the National Bureau of Statistics said the effects of the virus were primarily at the local level.

Françoise Fan, senior economist at Euler Hermes, a subsidiary of Allianz, said: “If it lasts only a week or two, it can be a data blip. »»

Covid’s latest wave has hit Jilin Province in northern China the hardest. This area accounts for the majority of new cases every day. The state banned travel to other parts of China on Monday and built an emergency hospital.

According to Citi, Changchun, the capital of Jillin, is the center of automobile manufacturing, but China’s GDP contribution is 0.65%, which is lower than Dongguan’s 0.95% and Shenzhen’s 2.73%.

Target Zero Corona Policy

China maintains a Zero-COVID policy of travel bans and rapid closure of neighborhood or office towers to control outbreaks. At least in Beijing, people with a travel history associated with a confirmed case may need to be quarantined at home for at least a week.

However, policy implementation is a goal.

For example, Shanghai officials said Tuesday that the city did not need to be blocked to control the outbreak. Shenzhen has ordered a global outage and remote work, but the port remains wide open.

“We have been informed that all ports and terminals in Shenzhen (salts and Zhuang) are currently operating normally,” shipping giant Maersk said in a statement. “This includes vessel operations, yard handling, and entry / exit gates. »»

“But the local warehouses have been closed and the closure has affected truck services. At other Chinese ports, there was no operational impact, but land transportation efficiency was reduced,” he said. The company says.

Shioda Port said in an online statement on Monday that it was operating normally.

The Shenzhen government announced on Tuesday that it will close the port of Rentan on the border with Hong Kong. Shenzhen reported some confirmed Covid cases from its cross-border cargo driver, but did not announce that other ports were closed.

According to a Moody’s Analytics report on Tuesday, “financial distress” could continue beyond the first quarter to the start of the second quarter if the recent shutdown continues.

Will lockdown continue to work?

“China could have zero COVID-19 cases by the end of March due to various blockades early in the wave. Unlike the situation in Hong Kong, the current surge in cases is 2 without an equivalent blockade. Following the month, “the report said. “But this is becoming the biggest challenge for China’s Zero-COVID policy. »»

China launched a national vaccination campaign in late 2020 – primarily at doses of Sinopharm and Sinovac. As of Monday, approximately 1.24 billion people, including 211.62 million people over the age of 60, have been fully vaccinated, according to the National Health Commission.

The Commission said that 65% of older people diagnosed with severe covid were not vaccinated.

The Chinese National Health Commission said Tuesday that the proportion of BA.2 omicron submutants in Covid cases has increased significantly in the last two months.

The new variant is more contagious than the previous strain, but it is unclear if it is more deadly.

– CNBC’s Holly Ellyatt and Michael Bloom contributed to this report.