Economic Impact Of China’s Increasing Covid Outbreaks Not To Be As Severe As Feared

As China battles its greatest Covid-19 epidemic since the pandemic began, consumption is expected to be the hardest hurt, while producers find methods to keep producing.

Mainland China reported a drop in new confirmed cases for the second day in a row on Wednesday.

According to National Health Commission data, the 1,226 new locally transmitted cases reported for the day is the lowest since Friday, when the new daily case count was a far lower 476. Mainland China has not recorded any new deaths as a result of the recent Covid outbreak, and its numbers remain far lower than those of other large countries.

According to Dan Wang, Shanghai-based chief economist at Hang Seng Bank, the omicron wave is “more similar to the power shortage crisis from late last year.”

She was referring to the manufacturing power outages that occurred in the fall and disrupted productivity.

Wang anticipates factories to be impacted for little more than two weeks this time, as opposed to several weeks in early 2020, when certain locations took several weeks to restart.

 “There is risk that this might come back again and again and again,” she said. “If that’s the case then it will have a lasting impact. But if it’s just this month we wouldn’t feel much pain.”

Apple supplier Foxconn said Wednesday that it had largely resumed manufacturing in Shenzhen at plant campuses that also contain staff housing, after suspending local operations on Monday.

In an online client advice posted Wednesday, shipping giant Maersk claimed that terminals in major Greater China ports are “business as usual,” including vessel operating, yard operations, and gate-in and out.

However, several depots for shipping goods through Shenzhen have been shuttered since Tuesday, and warehouses have been closed for the week, according to the company.

Trucking services in the area will likely be “severely damaged by 30%,” according to Maersk, due to Covid testing regulations for truck drivers and greater road management between Shenzhen and adjacent cities.

Covid had a modest impact on supply chains, including automotive and semiconductors, according to a report released earlier this week by Bank of America Securities.

According to Bruce Pang, head of macro and strategy research at China Renaissance, supply chain shocks are rather minor so far, but the primary economic impact is on consumer spending and the services industry.

Not only does Covid have an effect on service businesses that rely on in-person and social meetings, particularly catering, but it also lowers people’s confidence and spending expectations, he claims.

If they “don’t know when the pandemic will end, they won’t dare to spend money, and will prudently save.”

 He anticipates a 7 percent increase in retail sales this year.

Since the outbreak of the epidemic, consumer spending has been slow. Retail sales increased by 6.7 per cent from a year ago in January and February, according to data released this week. This is a big increase from December and beats experts’ estimates.

The Chinese government’s initial response to new Covid cases has been to impose travel restrictions as well as isolate and quarantine confirmed patients or contacts. Authorities impose travel restrictions based on exposure to medium or high-risk regions, which might be as little as a single building or office park.

According to official media, the mainland added three more high-risk districts on Wednesday, bringing the total to 23.

According to sources, that number had dropped to zero as recently as February 18.

Consumption, including any impact from Covid, is only one facet of China’s economy, which was already weakening before the new surge of omicron cases. Following Beijing’s efforts to decrease developers’ reliance on debt, the enormous real estate sector has struggled, while commodity prices have risen, especially after Russia invaded Ukraine in late February.

“Factories are also closing down for different reasons. It’s not just Covid,” Hang Seng China’s Wang said, noting many had closed before the latest outbreak due to high raw material costs and price controls on end products like food and gas.

Rising manufacturing costs and the inability to boost consumer prices would reduce, if not eliminate, earnings.

According to Reuters, Tesla halted production at its Shanghai factory on Wednesday and Thursday without offering a reason, citing an internal memo. CNBC reached out to Tesla for comment on the allegation, but the company did not immediately react.

“Tesla & SpaceX are encountering considerable recent inflation pressure in raw materials & logistics,” Tesla CEO Elon Musk said in a tweet this week.

(Adapted from CNBC.com)

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