China's Covid lockdowns could threaten half of economy

Beijing

WIDESPREAD lockdowns in China akin to the measures just taken in the southern technology hub of Shenzhen could affect half of the country's gross domestic product.

The authorities on Sunday (Mar 13) placed Shenzhen's 17.5 million residents into lockdown for at least a week amid a surge of Covid-19 infections in the city, a move that could affect Guangdong province, which accounts for 11 per cent of gross domestic product (GDP). As cases jump elsewhere, half of China's GDP and population will be impacted by the latest outbreak, according to economists at Australia & New Zealand Banking Group (ANZ). Shenzhen sits in the southern province of Guangdong.

"Previous steps to contain virus flare-ups left manufacturing unscathed for the most part," Bloomberg Economics' Chang Shu and David Qu wrote in a note on Monday. The lockdown in Shenzhen will hit output in industries such as tech and machinery, which feed into global supply chains, they said. "The double hit to consumption and output, plus spillovers beyond China raise the stakes in this lockdown," the economists added.

The rapid spread of coronavirus in recent days has led Shanghai to suspend in-person classes and shut intercity bus services, while the north-east industrial centre of Changchun, in Jilin - a city of about 9 million people and accounting for about 11 per cent of China's total annual car output in 2020 - was locked down last week.

"More cities may follow the practice of Shenzhen," said Raymond Yeung, chief economist for Greater China at ANZ, noting the city's decision to shut down public transport and prevent people from leaving or entering. "If the lockdown is extended, China's economic growth will be significantly affected."

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While Yeung said ANZ is not yet revising its forecast for 2022, it is "wary" of further restrictions. ANZ forecasts GDP growth of 5 per cent for the year, less than the government's target of about 5.5 per cent. Should key provinces along the coast and in the north-east follow Shenzhen's lead and lock down for a week, the economic cost could amount to 0.8 of a percentage point of GDP growth, Yeung said.

Nomura Holdings said market participants may be too optimistic about this year's growth outlook. The bank expects GDP expansion of 4.3 per cent, well below economists' consensus forecast of 5.2 per cent.

China is facing rapidly spreading clusters spawned by the highly infectious Omicron variant. Daily new cases jumped to more than 3,300 on Saturday from just over 300 a week ago. The surge poses an unprecedented challenge to the country's Covid-zero strategy, which has so far protected its vast industrial sector but dampened consumption.

Shenzhen is home to the headquarters of tech giants like Tencent Holdings and Huawei Technologies. Apple supplier Foxconn, the Taiwanese company also known as Hon Hai Precision Industry, has its China headquarters in the area. The company has halted operations in Shenzhen, including at a site that produces iPhones, in response to the lockdown. Major financial companies, including Ping An Insurance Group and China Merchants Bank are also headquartered in the city. And several foreign banks like UBS and HSBC have opened branches in the area. Brokerages and big state banks in the city have suspended in-person services after the lockdown, according to notices and local media reports.

Shenzhen is the second-most important port in China after Shanghai, and processes about 10 per cent of the containers shipped from China in any month. Yantian port said in a Monday statement that it is operating normally after Shenzhen tightened virus controls. Guangdong's US$795 billion worth of exports in 2021 accounted for 23 per cent of China's shipments that year, the most of any province, according to Bloomberg Economics.

Shenzhen alone had exports of US$303 billion. "Even if the lockdown is in place for only a short period - our baseline case - the impact will likely last for a few weeks longer due to likely disruptions to supply in the city and the reverberations beyond," the economists said.

While Covid-zero has not led to major economic disruption so far, the restrictions are making the economy "particularly vulnerable to the more contagious Omicron variant", said Louis Kuijs, Asia-Pacific chief economist at S&P Global Ratings.

"Globally, the economic impact of Covid is declining as governments ease restrictions and many move towards a 'living with Covid' approach," Kuijs added. "However, for China, Omicron is a key risk for domestic demand, output and, possibly, supply chains." BLOOMBERG