What does China’s Covid Delta outbreak mean for the economy? 

It has been a volatile few weeks for China, from regulators announcing crackdown after crackdown, to the country being forced to ease monetary policy.

But China is also grappling with a bigger issue: rising cases of coronavirus caused by the Delta variant.

This has prompted China to launch a fresh batch of targeted lockdowns, travel restrictions and mass testing once again.

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So what is going on and what might it mean for the economy?

China’s Covid outbreak

China reported on Sunday 94 new locally-transmitted Covid cases, according to the National Health Commission. Further cause for alarm came in the form of 31 new imported cases, including eight in Shanghai, Guangdong, Yennain, and a handful in other cities including Beijing, Inner Mongolia and Sichuan, reports the China Daily.

While these numbers are strikingly low compared to the Delta experience in other parts of the world, the cases are still concerning. China came out of the initial pandemic relatively unscathed. Having been the first country to go into lockdown, it was also the first country to recover and enjoyed something of a V-shaped recovery.

The rise in cases now comes at a delicate time. It puts the recovery in doubt at a time when economic data shows that the world’s second largest economy was already struggling.

Data published over the weekend showed that Chinese exports grew by 19% in July year-on-year, below economists’ forecasts and significantly below June’s reading of 32%.

Indeed, at a time where most central banks around the world are talking about tapering or tightening monetary policy, China loosened policy last month by reducing banks’ reserve ratio requirements, making it easier for them to lend money.

My colleague John explained last month why China’s V-shaped recovery is a double-edged sword in a global economy and why it had to loosen policy.

To complicate things, factory gate prices (or producer prices), a key inflation measure, also rose in July. The rise came despite efforts by the country’s policymakers to prevent a commodity driven inflation.

What does this mean?

Producer price inflation (PPI) can be an early indicator of inflationary pressures. If factories have to pay higher costs for materials such as oil or metal, they will almost certainly try to pass these higher costs on to consumers, who in turn may demand higher wages.

Now of course, this is China and globally we’re still in the middle of a massive economic rebound. So we’re not talking about a recession here. However, the delta outbreak, among other things, has prompted major US banks such as Goldman Sachs and JP Morgan to downgrade their growth forecasts.

Goldman Sachs expects Chinese GDP growth to now come in at 8.3% in 2021, lower than a previous estimate of 8.6%. ”With the virus spreading to many of China’s provinces and local governments reacting swiftly to control the spread of the highly contagious delta variant, we have begun to see softening in national aggregate data.”

Goldman thinks that Chinese efforts to thwart the outbreaks will ultimately prevail and that growth will pick up in the fourth quarter. But in the meantime, will China’s decisions reverberate across all markets?

What exactly does it mean for investors?

The oil market certainly didn’t appreciate the news. The Brent benchmark shed as much as 4.5% on Monday as delta fears resurfaced. This is hardly surprising.

As Craig Erlam, senior markets analyst at OANDA puts it: “The fact that China is already importing lower numbers of crude, as well as other commodities like iron ore and copper, doesn't help the outlook or prices."

We have been through this cycle a few times already. Cases rise in some regions of the world, fear over growth rates spikes, and the more growth-sensitive markets (such as oil) wilt. As long as vaccines appear to keep working, then concerns over demand for energy products should be mollified.

That said, while 1.6 billion doses of vaccine are believed to have been administered in China, the country admitted earlier in April that local vaccines do not offer sufficient protection. So if hospitalisations and deaths continue to rise despite vaccinations then that could spell trouble for the global economy.