COVID LOCKDOWNS TO BRING THE CHINESE ECONOMY TO A HALT?

29.04.22 As COVID lockdowns in China become more widespread what are the implications for the 2022 Chinese economic outlook?

China’s zero Covid policy increasingly differs from the West’s herd immunity strategy. The Chinese policy relies upon mass testing, heavy use of centralised quarantine facilities, lock downs and closure of non-essential businesses. The reasons for this draconian approach are less developed healthcare facilities, lower vaccination rates amongst the elderly and a less effective domestic vaccination programme. At present around twenty five percent of the population are in lockdown. This represents around 40 percent of the economy.

Prior to the spread of the Omicron wave the Chinese economy was already slowing. This primarily reflected a slowdown in real estate development, as credit problems in the sector led to a retrenchment in activity. As real estate had contributed around one quarter of Chinese growth in recent years the 2022 economic expansion was already expected to be sluggish. However, the Covid lock downs look set to pile more downward pressure on the economy.

As a result of the above there are expected to be some tax cuts, increased lending and tax rebates for companies engaged in building out the technological capacity of the economy. There are also likely to be limited cuts in key interest rates.

The Chinese government’s official 2022 growth target is 5.5%. At present, based on the measures announced above, the risks are very much to the downside with 2-3 % looking more realistic. Lock downs in China are likely to prolong supply chain disruptions that have contributed to recent high inflation rates. However, it will also slow global growth which will mean that monetary policy in advanced economies will need to be tightened less going forward. Overall modestly supportive for bonds and equities.

Categorised in: Uncategorised

This post was written by Robin