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China's new Covid restrictions unlikely to upend supply chains

Authorities move quickly to reopen factories once pockets of infection are identified
March 21, 2022
  • Foxconn reports reopening of Shenzhen campuses
  • Hit to services likely as fewer people travel and shop

Lockdowns introduced on mainland China aimed at curbing the widest spread of the coronavirus in two years should not lead to more supply chain chaos but could weaken domestic growth.

Currently, around 50mn people in China are subject to some form of movement restrictions and factories in economic hubs such as Shenzhen and Changchun have faced closures.

Areas currently facing outbreaks produce about half of China’s goods and three-quarters of its exports, according to Capital Economics. But ports remain open and in some places restrictions are already being lifted, the firm's chief Asia economist Mark Williams said.

“Shenzhen is starting to reopen in a controlled way: manufacturers are restarting operations, some restrictions on people’s movement are being eased,” he said.

On Monday, Hon Hai Precision Industry (TW:2317), the assembler of iPhones and other devices better known as Foxconn, said two campuses in Shenzhen had been cleared to reopen following their shutdown last week.

Although China’s 'zero-Covid' policy has placed severe restrictions on areas where infections have spread, officials have prioritised restoring industrial activity, Williams said.

“We saw in Tianjin when it had an Omicron outbreak in January that factories reopened after just three or four days, once the government had mass-tested the population and gained confidence that they knew where the pockets of infection were,” he said. 

Moreover, although port closures can’t be ruled out if infections spread, delivery backlogs should not be as severe as when most other countries also faced lockdowns and spending on electronics, furniture and other household items soared.

Room to roam

“Supply shortages were as much about strong demand as they were about a shortage of supply,” said Capital Economics’ head of global economics Jennifer McKeown.  

“Some of that demand disruption has gone away now that advanced economies aren’t in the same position with lockdowns.”

Data published on Friday showed the eurozone's trade deficit with China narrowed in January to €7.7bn (£6.5bn), from €9.7bn in December. Imports from China dropped by 4 per cent. Although it is too early to say whether this is a long-term trend, some mean reversion is likely following a 33 per cent increase in imports from China in the second half of last year,  according to Pantheon Macroeconomics.

Container shipping rates from China to ports in the US and Europe remain at elevated levels but dropped by 8 per cent to the US East Coast and 6 per cent to Europe last week, the Freightos Baltic Index showed.

The most severe impact of the lockdowns could be felt domestically, as restrictions mean fewer people travel or spend money in malls, according to Williams, who said the services part of the Chinese economy would be "more depressed". 

Although China’s government this month set an official GDP growth target of 5.5 per cent for 2022, Capital Economics forecasts growth of just 2-3 per cent, which it said would be “extremely weak” compared with its recent history. Official figures put China's GDP growth last year at 8.1 per cent. 

Credit Suisse analysts argued the effect of pandemic restrictions would be minimal, though, forecasting a 0.5-1.0 per cent reduction in GDP this year in its “worst-case scenario”. 

The Swiss lender remains bullish on Chinese equities following a recent sell-off, with the CSI 300 index down 13 per cent so far this year. In a note published last week, it said earnings were being revised upwards prior to the pandemic and that the country’s property sector was showing signs of stabilising. “Excess liquidity is turning up and will likely go into financial assets.”