A man brings a child to a window in a tent to be tested for Covid-19 in Changchun city, northeast China’s Jilin province, 15 March 2022.
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BEIJING. The latest outbreak of Covid-19 in China could hit gross domestic product in the first quarter by at least half a percentage point, Citi analysts predicted in a report released Tuesday.
Over the past few days, mainland China has experienced its worst Covid outbreak since the pandemic’s initial peak in early 2020, when the economy contracted. The latest spike in cases linked to the highly contagious omicron variant has forced some manufacturing centers across the country to suspend or restrict production.
Citi estimates that the most affected regions account for 16.7% of national GDP.
“This time, the economic losses could be real,” analysts say. “Jointly looking at the spillover effect for other regions, we believe the lockdown and tightening of quarantine measures in this round could potentially deduct ~0.5-0.8 p.p. GDP growth in the first quarter if no policy action is taken.”
Mainland China reported 1,860 confirmed cases of Covid on Tuesday, up from more than 3,500 new cases a day earlier. The country has reported no new deaths and the number of new cases is still much lower than in other parts of the world such as Europe.
Beijing’s anti-Covid policy measures have prompted analysts to release reports of growing risks of a slowdown in the world’s second-largest economy, even if few can give a figure yet.
Uneven image
“We believe the omicron wave presents both risks and opportunities for China,” Bank of America Securities China equity strategy group said in a report released Tuesday.
If the pandemic is managed, the outbreaks could help China prepare to reopen its borders, analysts say. But otherwise, they said, the wave of omicrons “could lead to a significant reduction in China’s GDP growth and disruption of global supply chains in the near term and potentially accelerate the disconnection and relocation of supply chains in the medium term.”
So far, analyst research and inspections of local factories show limited impact on chips, cars, clothing and beer, among other industries. The report says that the Android smartphone supply chain could be among the hardest hit. But, as in other industries, production can be moved to other places.
In terms of vehicles, the analysts said that “According to channel checks, a couple of Shanghai companies have experienced more severe disruptions while BYD’s Shenzhen plant is operating as normal as of March 14.”
BYD did not immediately respond to CNBC’s request for comment.
We have been advised that all ports and terminals in Shenzhen (Yantian and Chiwan) are currently operating as normal.
The lockdown and production suspension measures announced by Shenzhen and Dongguan – two manufacturing hubs in the export-export province of Guangdong – will only last about a week.
Economic data for January and February, released on Tuesday, came in well above expectations, with a National Bureau of Statistics spokesman saying the impact of the virus would be mostly at the local level.
“March could be a different picture depending on how long the restrictions last in Shenzhen and Jilin,” said Francoise Huang, senior economist at Euler Hermes, a subsidiary of Allianz. “If it only lasts one or two weeks, it could be a spike in the data.”
The latest wave of Covid has hit northern China’s Jilin province the hardest, where the region accounts for the majority of daily new cases. On Monday, the province banned travel to other parts of China and is building emergency hospitals.
Although Jilin’s capital city of Changchun is the hub of the automotive industry, China’s contribution to GDP is 0.65%, down from Dongguan’s 0.95% and Shenzhen’s 2.73%, according to Citi.
Targeted Zero Covid Policy
China is pursuing a policy of travel restrictions and rapid lockdowns of neighborhoods or office towers to control outbreaks. At least in Beijing, people with a travel history linked to confirmed cases may need to self-quarantine for a week or more.
But the implementation of the policy was purposeful.
For example, a Shanghai government official said on Tuesday that there is no need to lock down the city to control the outbreak. And while Shenzhen has ordered a complete halt to production and remote work, its ports have largely remained open.
“We have been advised that all ports and terminals in Shenzhen (Yantian and Chiwan) are currently operating as normal,” the shipping giant Maersk said in a statement. “This includes ship operations, yard handling, and getting in and out.”
“However, local warehouses have been closed and trucking services have been affected by the lockdown. There were no operational impacts at other Chinese ports, but the efficiency of land transportation has declined,” the company said.
Yantian Port said in an online statement on Monday that it is operating as normal.
The Shenzhen government announced on Tuesday the closure of the port of Liantan on the land border with Hong Kong. Shenzhen has reported several confirmed cases of Covid in truck drivers across that border, but no announcements of other ports being closed.
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If recent lockdowns persist, the “economic pain” could extend past the first quarter into the second, Moody’s Analytics said in a report on Tuesday.
Do locks still work?
“China may be early enough in the wave that the various lockdowns will bring COVID-19 cases to zero by the end of March, in contrast to the situation in Hong Kong, where the current surge in cases has continued since February without an equivalent lockdown. “However, this will be the biggest test for China’s COVID zero stance.”
China began rolling out a nationwide vaccination campaign in late 2020, mainly with doses from Sinopharm and Sinovac. About 1.24 billion people were fully vaccinated as of Monday, including 211.62 million people over 60, according to the National Health Commission.
The commission said that 65% of older people diagnosed with severe Covid were not vaccinated.
The proportion of the omicron BA.2 subvariant among Covid cases has increased significantly over the past two months, China’s National Health Commission said on Tuesday.
The new variant is more contagious than previous strains, but it’s not clear if it’s more deadly.
— Holly Ellatt of CNBC and Michael Bloom contributed to this report.