How China's “zero-Covid” policy could affect the global economy

Almost two years after Covid restrictions were introduced, England is on course to lift them later this week. But restrictions in China are being reintroduced to combat the country’s worst outbreak in two years.

China has imposed a one-week lockdown in the city of Shenzhen, due to rising Covid cases. The city, sometimes described as China’s Silicon Valley, is home to the world’s fourth-largest port, Yantian International Container Terminals.

“Yantian is thought to handle about 90% of China’s vast electronics exports, making it a key cog in global trade,” says The Times. So what is going on and what do China’s new restrictions mean for supply chains and the economy?

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Why are cases rising and how severe are new measures?

Authorities have thrust around 17 million of Shenzhen’s residents into lockdown, as the number of Covid cases soars. They have also imposed a travel ban in the Jilin province, home to more than 24 million residents. Jillin residents have been barred from leaving their homes, and nobody can leave the province without police permission.

The stricter measures come after cases in China almost doubled on Monday to nearly 3,400, prompting measures that could threaten half of China’s GDP, says Bloomberg.

China’s surge in cases is thought to be related to a sharp rise in neighbouring Hong Kong; Shenzhen tightened its management of cross-border shipping after Hong Kong reported almost 27,000 cases and 250 deaths on Monday. China is still pursuing a “zero-covid policy”, hence the drastic lockdown.

What is China’s “zero Covid” policy?

China has maintained a “zero-Covid” policy since the virus was first detected in Wuhan in 2019. Its approach involved imposing hard citywide lockdowns, mass testing and travel restrictions early on after any outbreak of cases. This is the equivalent of UK prime minister Boris Johnson issuing a stay-at-home order and shutting pubs every time cases spike.

But the emergence of the omicron variant has put China’s zero-Covid efforts into doubt. Barry Norris, manager of the Argonaut Return Fund, has previously told MoneyWeek how the world economy is at threat due to this strategy because of the resulting continuous lockdowns and their effects on supply chains.

Which large companies have been affected?

Chinese lockdowns are wreaking havoc on a number of international companies who have halted operations in the country. Apple supplier Foxconn said it had suspended operations in the city until further notice. It told the BBC that it would reallocate work among backup plants in an effort to minimise any disruption.

Car manufacturers are also feeling the pinch. Toyota has shut its factory in Changchun and has not said when it might resume operations. Volkswagen followed suit, shutting its operations in Changchun, although the company hopes to resume later this week.

What does this mean for the global economy?

The main economic concern is that it will further damage supply chains at a time when they were still fragile from the effects of previous lockdowns in the last two years.

Russia’s invasion of Ukraine last month is also exacerbating supply chain issues. Both countries are agricultural powerhouses, so Western sanctions and the destruction of Ukraine’s agricultural infrastructure threaten to send the price of key commodities soaring. Prolonged lockdowns in China may make this worse.

With many people in the UK bracing themselves for inflation of around 7% this year; and US inflation already at a 40-year high of almost 8%, central banks might feel under pressure to raise interest rates more swiftly and sharply than previously expected, even although the rising costs are arguably disinflationary in the longer run (because they squeeze consumer spending).

China set itself a GDP growth target of 5.5% this year. This was already considered somewhat ambitious and it’s now very much in doubt, says Bloomberg: “With tighter virus controls in places like Guangdong and Shanghai disrupting manufacturing, an ongoing contraction in the country’s huge property market showing no signs of easing and an oil price hike pushing up business and consumer costs”.

How have markets reacted?

China’s outbreak has rattled markets – the Shanghai Composite stockmarket index fell 5%, while Hong Kong’s Hang Seng index, which hosts many Chinese tech giants, lost more than 6% on Tuesday. And with China the world’s top importer of crude oil in 2020, benchmark crude oil prices fell below $100 a barrel on Tuesday.

But some analysts think any disruptions will be short-lived and China and the wider world will be able to weather the storm. Yeang Cheng Ling, senior investment strategist at DBS Bank, said: "Such lockdowns have happened before, and (cities) have re-opened within a short period of time once the number of Covid cases were within control”.

While the recent restrictions imposed by China are the most severe since 2020, they still are still less stringent than those imposed at the start of the pandemic. And while Zhang Wenhong, a Chinese infectious disease expert, has dubbed the recent outbreaks as the "the most difficult period in the last two years of battling Covid" he says the outbreaks are still at an early stage.

So, for now, disruption may be short-lived. But UBS analyst Grace Chen said if the lockdowns spread to other cities such as Shanghai, this would spell more trouble for production and supply chains.