China’s zero-Covid policy risks creating even greater economic damage, experts have warned, despite the Omicron wave receding in several regions.
Covid-19 cases in six provinces, including Shanghai, Heilongjiang and Jilin, have fallen over the past seven days after many residents were prevented from leaving their homes for weeks, suggesting that the worst of the Omicron outbreak could be over for regions that were hit early.
But even as cases wane in the most badly affected cities, authorities are still imposing intercity travel restrictions that are clogging up vital transport links between suppliers and manufacturers.
“The supply chain impact from this lockdown will be at least as bad, if not worse, than in spring 2020,” said Lu Ting, chief China Economist at Nomura. “Wuhan as an industrial base is not as important as Shanghai,” he added, explaining the city and the surrounding Yangtze River Delta area were home to the country’s automotive, semiconductor and textile industries.
Lu added that the timing of this Omicron wave, which started in March, was also worse for economic growth than the first coronavirus outbreak when its manufacturing and construction sector was in a lull because of the lunar new year holiday.
Logan Wright, head of China markets research at Rhodium Group, a consultancy, said that even though some authorities were beginning to ease restrictions within cities, it was not a “cause for relief” for manufacturers, which relies on the free flow of goods between metropolises.
Wright estimated that inter-city road traffic in Jiangsu and Zhejiang, both of which border Shanghai, had plummeted about 70 per cent and 50 per cent respectively this week compared with 2021.
The Omicron surge occurred at a delicate time for the country’s economy following a debt crisis at several large real estate companies that spread across the property sector. Beijing is targeting growth of 5.5 per cent this year, which would be the lowest annual rate in three decades.
“The deterioration of the property sector has been accelerated by lockdowns. When people are unable to move around, it has a knock-on impact on the service sector and then on incomes,” said Wright.
The warnings followed stinging criticism of the government from the founder of one of Asia’s biggest private equity investors. Weijian Shan, whose PAG group manages more than $50bn, said Beijing’s policies had caused “deep economic crisis” comparable to the global financial crash.
China’s strict measures are also having a ripple effect beyond its borders, with manufacturers struggling to get crucial components on time. This week, General Electric said “significant supply chain constraints” had resulted in lower output in its commercial aircraft engines business.
According to logistics monitoring group FourKites, ships in Shanghai are waiting on average 8.9 days for cargo to change hands, an increase of 162 per cent compared with March 12, just before the city went into a partial lockdown.
“This is exacerbating global inflation, with businesses having difficulty getting components from the Chinese manufacturing sector,” said Wright.
Large electronics makers, including Apple, HP and Dell, could face manufacturing delays with big parts of their supply chain located in badly hit regions around the Yangtze River Delta.
A Nikkei Asia analysis revealed that about half of Apple’s top 200 suppliers had facilities in and around Shanghai, where lockdown restrictions have disrupted production and logistics networks.
Shanghai authorities have started to allow some people in neighborhoods with no infections to leave their homes, but much of the city’s 25mn residents remain under lockdown. The financial hub announced more than 10,600 cases on Thursday, the fifth consecutive day reported infections have fallen.
But as cases in the worst-affected regions during the initial Omicron outbreak have plateaued or started to fall, four provinces — including Beijing and Shandong — remain on high alert as infections rise.
The capital reported 50 local infections on Thursday for tests that were administered on Wednesday after the authorities ordered three rounds of citywide tests for its 20mn residents this week.
Beijing hopes to avert a Shanghai-style protracted lockdown and instead clamp down on the chains of community transmission much like the manufacturing hub of Shenzhen managed to do in March.
As some regions begin to ease curbs, Goldman Sachs estimated that areas that contributed 15 per cent of China’s gross domestic product were under partial or full lockdown, down from 35 per cent in late March.
Additional reporting by Xueqiao Wang in Shanghai