Market Overview

How China’s Zero-COVID Policy Is Taking A Toll On Its Economy

The more contagious omicron strain of COVID-19 tests China’s zero-tolerance COVID-19 policy. While many signs underscore the strategy’s adverse impact on its economic recovery, Beijing continues to stick to it, dismissing suggestions that China should learn to live with the virus as other nations do.

Lockdowns in Shenzhen and Shanghai

The resurgence of COVID-19 cases in Shenzhen, dubbed China’s Silicon Valley, prompted authorities to impose a week-long lockdown of its 17.5 million residents in March. The curbs forced the closure of some factories, including those of Apple (NASDAQ:AAPL) supplier Foxconn and carmakers Toyota Motor (NYSE:TM) and Volkswagen (OTC:VLKAF).

Shenzhen is also home to tech giants, including Tencent Holdings (OTC:TCEHY) and Huawei Technologies.

While JP Morgan analysts do not expect the Shenzhen lockdown to have a big impact on iPhone production, some economists have delivered a grim warning on the lockdown in Shanghai. Authorities in China’s financial hub last week extended the lockdown of 26 million people as the city launched its largest public health response in the COVID-19 pandemic era.

ING Bank’s Greater China chief economist Iris Pang warned that the lockdown in Shanghai and other areas in China would have a “huge” cost on the country’s growth. Shanghai is tipped to suffer a 6% GDP loss if the lockdown persists in April, leading to a 2% GDP loss for the whole of China.

The lockdown in Shanghai also affected the production of some known brands, including Tesla (NASDAQ:TSLA), German auto parts giant Bosch, and Taiwan’s Pegatron (TW:4938), another iPhone assembler.

Offshore Yuan and China H-shares

After trending downward for the previous seven months, news of the extreme lockdowns prompted the USD/CNH to break upwards and out of its channel. The USD/CNH, at this point, doesn’t have a clear path back to its previous territory.

Conversely, the China H-shares index saw a reversal of fortune on Mar. 16. The China H-shares index follows Chinese incorporated companies which are traded on exchanges outside the country. The boost may have come from investors realizing that China would be unlikely to face sanctions from the US after failing to condemn the Russian invasion of Ukraine more forcibly in the beginning.China H-shares index.

GDP Slowdown

The latest developments in China are widely expected to take a toll on the economy that is already battered by the slowdown in the real estate sector and other downward risks. Everbright Securities recently warned that Beijing’s move to cling to its zero-COVID strategy could knock ten percentage points out China’s GDP in the first quarter.

Natixis, meanwhile, expects the lockdowns and transport restrictions to slash 1.8 percentage points from China’s first-quarter GDP. Julian Evans-Pritchard, senior China economist at Capital Economics, in late March warned that “the economy is in the midst of its most abrupt downturn since early 2020.” China will release its quarterly GDP data on Monday, Apr. 18.


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