What China's zero-COVID issues mean for global economic growth

What China’s zero-COVID issues mean for global economic growth

China’s strict zero COVID policy has complicated the global economic recovery.

The country tried to eliminate all cases of COVID-19, but three years later frequent shutdowns and strict quarantine guidelines led to food shortages, delayed health care and mental health issues.

Ongoing citizen frustrations reached a boiling point on November 24, when protests erupted after a fire broke out at an apartment building in the city of Urumqi, killing 10 people during the 100 days city ​​closure. Since then, large-scale protests have erupted in major cities across China such as Shanghai, Beijing and Wuhan, leading Chinese authorities to relax some of the country’s COVID rules.

Despite a certain easing, foreign investors in China are worried about the country’s economic situation. On November 28, after the first wave of protests, global stock markets closed lower. Apple (AAPL) fell 2% and crude oil prices fell to an 11-month low.

“It has a huge impact on economic growth when large parts of the country continue to exist under various forms of lockdown,” Dane Chamorro, head of global risk and intelligence at Control Risks, told Yahoo Finance (video below). above). “China is absolutely essential for global growth.”

An epidemic control worker wears PPE as his face shield fogs up in the cold while waiting outside a community under COVID-19 lockdown on December 2, 2022 in Beijing, China.  (Photo by Kevin Frayer/Getty Images)

An epidemic control worker wears PPE as his face shield fogs up in the cold while waiting outside a community under COVID-19 lockdown on December 2, 2022 in Beijing, China. (Photo by Kevin Frayer/Getty Images)

Even with the easing of restrictions, local governments across the country are now under pressure to carry out mass testing and enforce the quarantine policy if necessary. According to CNN Business, many of these cities are already starting to run out of cash, which is taking a heavy toll on the country’s overall financial health.

“When China’s economy shrinks by 1%, the global economy shrinks by about 0.5%, but there are also large countries that are major trading partners and suppliers to China – countries like Indonesia or Chile, [and] usually they provide raw materials,” Chamorro said. “When China contracts 1%, it contracts almost a full percentage point.

Business risks

The “Made in China” brand may no longer be the symbol of international trade that it once was.

Influential multinational giants like Apple and Tesla (TSLA) own some of the largest manufacturing centers in China. However, due to social unrest, Apple is expected to produce 6 million fewer iPhones after workers at the Foxconn factory in Zhengzhou protested the handling of the outbreak and payment delays.

“It’s one of the few mistakes about Apple,” said Keith Fitz-Gerald, a private investor at Yahoo Finance, explaining that the COVID protests in China were creating more doubt and uncertainty for investors.

However, companies like Apple could return to manufacturing in Vietnam, Thailand, India and even the United States. By the end of this year, Apple is expected to move 5% of its iPhone 14 production to India as Foxconn explores manufacturing opportunities there, according to JPMorgan.

China was the world’s second-largest recipient of foreign direct investment (FDI) in 2021, with nearly $179 billion flowing into the country, but China’s current investment outlook is bleak. Although Chinese markets are more open than a decade ago, the FDI market openness index for China is still below 1, as the Chinese government remains heavily involved in financial institutions, banks and private companies, according to a report by the Atlantic Council.

Stephen Roach, professor of economics at Yale University, predicts “continued impacts” on China’s economy and, therefore, the global economy.

“The numbers I’ve seen suggest that the current wave of lockdowns is affecting areas that represent around 25% of China’s GDP, which is higher than last April during the Shanghai-focused lockdowns,” Roach told Yahoo. Finance. “This has implications for China’s near-term growth prospects with ripple effects around the world.”

According to Roach, economic reopening in China hinges on the spread of the Omicron variant. Now companies that relied on China’s “low-cost and highly efficient offshore production platform are rethinking” their presence in China, he said, which is not only the result of the COVID epidemic but also of the United States. Chinese tensions linked to China’s strategies with Russia.

“You can’t put all your eggs in one Chinese basket anymore,” Roach said.

Supply chain issues breed more uncertainty

Investors are also worried about human rights abuses and production targets in China.

Zero-COVID measures have done little to ease the supply chain bottlenecks passed down since 2020, and now with the COVID protests, inconsistent production may continue. This could prolong high inflation which could stand at 4% – instead of the Fed’s 2% target – according to economist Mohammed El-Erian.

The disruption to Apple’s supply chain is one of many. China exports $2.65 trillion worth of products to the world, with most of those exports going to the United States. This global trade network has left most European countries and the United States heavily dependent on China, which has become the quintessential “trade titan”.

As a result, changes in China could help determine whether the United States goes straight into a recession.

“The supply chain issues that many of these companies are experiencing are going to hit their bottom line and top bottom line in the near term,” Saruhan Hatipoglu, CEO of Business Environment Risk Intelligence, told Yahoo Finance. He added that there is already an impact on consumers that is likely to get worse, especially at a time when consumer confidence is at its lowest level since July at 100.2.

China could fully reopen by mid-2023, Bloomberg economist says, but until then social unrest, lack of market openness, supply chain issues and the government’s role in management of the virus will keep investors on their toes.

“We have to watch what’s happening in terms of the supply chain implications, the geopolitical tension implications between the US and China,” HPE CEO Tarek Robbiati said in an interview with YahooFinance.

The next steps

Going forward, economists do not know what will be the next step for the Chinese economy and the global economy.

Last month, Goldman Sachs raised its forecast for China’s GDP to 4.5% for 2023, citing the country’s reopening, while Barclays cut its forecast to 3.8%.

International Monetary Fund (IMF) Managing Director Kristalina Georgieva acknowledged the downside risks to China’s economy due to its zero-COVID policy. Currently, the IMF expects China’s GDP to grow 3.2% in 2022 and 4.4% in 2023.

People wearing face masks walk up an escalator in front of office towers in the Lujiazui financial district in Shanghai, China October 17, 2022. REUTERS/Aly Song

People wearing face masks walk up an escalator in front of office towers in the Lujiazui financial district in Shanghai, China October 17, 2022. REUTERS/Aly Song

“It is indeed possible that in this time of very great uncertainty, we will have to revise these projections downwards,” she told reporters on Tuesday.

Globally, the Organization for Economic Co-operation and Development (OECD) forecasts economic activity to grow by 3.1% in 2022 and just 2.2% in 2023.

“It is true that we do not foresee a global recession,” OECD Secretary-General Mathias Cormann told a press conference. “But it’s a very, very difficult prospect, and I don’t think anyone will take much comfort from the 2.2% global growth projection.”

Tanya is a data reporter at Yahoo Finance. You can follow her on Twitter @tanyakaushal00.

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