Chinese lockdown unrest upends global economic outlook

Chinese lockdown unrest upends global economic outlook

Growing protests over tough pandemic restrictions in China – the world’s second largest economy – are injecting a new element of uncertainty and instability into the global economy as nations already struggle to manage the fallout from a war in Ukraine, an energy crisis and painful inflation.

For years, China has served as a global factory and a vital engine of global growth, and the unrest there can only spread elsewhere. Analysts warn that more unrest could further slow the production and distribution of integrated circuits, machine parts, home appliances and more. It may also encourage companies in the United States and Europe to divest from China and diversify their supply chains more quickly.

Millions of Chinese citizens have chafed under a strict lockdown for months as the Communist Party seeks to overcome the spread of the Covid-19 virus, three years after it emerged. Anger turned into widespread protest after an apartment fire last week killed 10 people and comments on social media questioned whether the lockdown had stopped their escape.

It’s unclear whether the protests erupting across the country will be quickly quashed or turn into broader resistance to the iron rule of its top leader, Xi Jinping, but so far the greatest economic damage stems from of the lock.

“The biggest economic blow comes from zero-Covid policies,” said Carl Weinberg, chief economist at High Frequency Economics, a research firm. “I don’t see the protests themselves as a game-changer.”

“The world will always look to China for what it does best and cheaper,” he added.

Asked how the Biden administration has assessed the economic fallout from the latest unrest, John Kirby, strategic communications coordinator at the National Security Council, said Monday, “We don’t currently see any particular impact on the supply chain.” .

Concerns about the economic impact of the spread of unrest in China, however, seem to be partly responsible for the decline in global markets. The S&P 500 index closed down 1.5% as the dollar, often a safe haven in turbulent times, rose. Oil prices started the day with a sharp decline before rebounding.

The sheer size of China’s economy and resources make it a key player in global trade. “It’s extremely central to the global economy,” said Kerry Brown, an associate fellow in the Asia-Pacific program at Chatham House, an institute of international affairs in London. This uncertainty “will have a massive impact on the rest of the world”.

China now overtakes all countries as the top oil importer. It made nearly 30% of the world’s goods in 2021. “There is simply no alternative to what China offers in terms of scale and capabilities,” Brown said.

Pandemic-related delays and shortages have prompted many industries to reassess the resilience of their supply chains and consider additional sources of raw materials and workers. Apple, which recently announced it expects lower sales due to shutdowns at its Chinese factories, is one of many tech companies that has moved a small part of its production to other countries, like Vietnam or India.

The tilt of some companies away from China predates the pandemic, dating back to former President Donald J. Trump’s determination to start a trade war with China, a move that has led to a spiral of punitive tariffs.

Yet even as business and political leaders want to be less dependent on China, Brown said, “the raw reality is that it’s not going to happen anytime soon, if at all.”

“We should have no illusions that we can decouple quickly,” he added.

China’s size is a lure for American, European and other companies looking to not only make products quickly and cheaply, but also sell them in large numbers. There is simply no other market this big.

Tesla, John Deere and Volkswagen are among the companies that have bet on China for their future growth, but they may face some setbacks, at least in the short term. Volkswagen announced last week that its sales in China had stagnated this year, 14% below expectations.

The protests highlight the political risks associated with investing in China, but analysts say the recent surge reveals nothing investors don’t already know.

“Many investors will look to the future and position their portfolios now for reopening,” said Nigel Green, chief executive of deVere Group, a financial advisory firm. They “will seek to take advantage of the country’s transition from an export economy to a consumer economy”, he added.

Luxury brands continue to bet their future on growth in China.

As interconnected as the global economy is, one way China’s slowdown can help other nations is to keep energy prices low. Over the past 20 years, the growth of the Chinese economy has been one of the main drivers of global demand for oil and hydrocarbons in general.

Energy experts say the rising number of Covid infections and growing doubts that China will ease restrictions in major cities are a major reason why oil prices have fallen over the past three weeks to levels last seen before the Russian invasion of Ukraine in late February.

“Chinese demand is the most important driver of global oil demand,” said David Goldwyn, senior energy diplomat in the Obama administration. “China is the swing seeker.”

As China’s economy has eased in the grip of the Covid lockdown, fewer tankers have sailed into Chinese ports in recent weeks, forcing major oil producers in the Middle East and Russia to lower prices. Now, the spread of protests is creating further uncertainty about future demand.

Chinese oil demand is expected to average 15.1 million barrels per day this quarter, up from 15.8 million a year ago, according to Kpler, an analytics firm.

Regarding supply chain disruptions, Neil Shearing, chief economist at Capital Economics, a research firm, said he thought too much blame had been placed on China. “Everything was designed around supply shortages,” he said, but in China industrial production has increased during the pandemic. The problem was that global demand was growing more.

For now, the greatest economic impact will be felt in China, rather than the global economy. Sectors that rely on face-to-face contact – retail, hospitality, entertainment – ​​will be hit the hardest. Over the past three days, measures of people’s movements have dropped significantly, Mr Shearing said.

He added that more people are being quarantined now than at the height of the Omicron outbreak last winter. The wave of infections and the government’s response to it – not the protests – is what has “the biggest impact on the Chinese economy”, he said.

Clifford Krauss contributed reporting from Houston, and Michael D. Shear from Washington.

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