China’s zero-Covid policy risks creating even greater economic damage, experts have warned, despite the Omicron wave receding in several regions.
Covid-19 cases in six provinces including Shanghai, Heilongjiang and Jilin have plummeted in the past seven days after many residents were barred from leaving their homes for weeks, suggesting the worst of the Omicron outbreak could be passed for regions that were affected early.
But even as cases dwindle in the worst-hit cities, authorities are still imposing restrictions on intercity travel that obstruct vital transport links between suppliers and manufacturers.
“The impact of this lockdown on the supply chain will be at least as severe, if not worse, than in the spring of 2020,” said Lu Ting, chief China economist at Nomura. “Wuhan as an industrial base is not as important as Shanghai,” he added, explaining that the city and the surrounding Yangtze River Delta region were home to the country’s automotive, semiconductor and textile industries.
Lu added that the timing of this Omicron wave, which began in March, was also worse for economic growth than the first coronavirus outbreak when its manufacturing and construction sector was in a lull due to the New Year’s holiday. lunar year.
Logan Wright, head of Chinese markets research at Rhodium Group, a consultancy, said that while some authorities were starting to ease restrictions in cities, it was no “cause of relief” for manufacturers. , which rely on the free movement of goods between metropolises.
Wright estimated that intercity road traffic in Jiangsu and Zhejiang, which border Shanghai, fell about 70% and 50% respectively this week compared to 2021.
Omicron’s push came at a tricky time for the country’s economy following a debt crisis by several major real estate companies that spilled over into the real estate sector. Beijing is targeting 5.5% growth this year, which would be the lowest annual rate in three decades.
“The deterioration of the real estate sector has been accelerated by the lockdowns. When people can’t get around, it impacts the service industry and then revenue,” Wright said.
The warnings followed scathing criticism of the government from the founder of one of Asia’s biggest private equity investors. Weijian Shan, whose PAG group manages more than $50 billion, said Beijing’s policies had caused a “deep economic crisis” comparable to the global financial crash.
China’s strict measures are also having a ripple effect beyond its borders, with manufacturers struggling to get crucial components on time. This week, General Electric said “significant supply chain constraints” had led to lower production at its commercial aircraft engine business.
According to logistics watchdog group FourKites, ships in Shanghai wait an average of 8.9 days for cargo to change hands, a 162% increase from March 12, just before the city was partially shut down.
“This is exacerbating global inflation as companies struggle to obtain components from Chinese manufacturing,” Wright said.
Major electronics makers including Apple, HP and Dell could face manufacturing delays with large parts of their supply chain located in hard-hit regions around the Yangtze River Delta.
An analysis by Nikkei Asia found that around half of Apple’s top 200 suppliers had facilities in and around Shanghai, where lockdown restrictions have disrupted production and logistics networks.
Shanghai authorities have started allowing some people in infection-free neighborhoods to leave their homes, but many of the city’s 25 million people remain under lockdown. The financial hub announced more than 10,600 cases on Thursday, the fifth day in a row that reported infections have fallen.
But while cases in the worst-hit regions during the initial Omicron outbreak have plateaued or started to decline, four provinces – including Beijing and Shandong – remain on high alert as infections rise.
The capital reported 50 local infections on Thursday for tests that were administered on Wednesday after authorities this week ordered three rounds of citywide testing for its 20 million people.
Beijing hopes to avoid a protracted Shanghai-style lockdown and instead clamp down on chains of community transmission, just as manufacturing hub Shenzhen managed to do in March.
As some regions begin to ease restrictions, Goldman Sachs estimated areas that contributed 15% of China’s gross domestic product were under partial or full lockdown, down from 35% at the end of March.
Additional reporting by Xueqiao Wang in Shanghai