Why China’s strict COVID response threatens more supply issues and possible inflation

Chinese officials and the WHO have discussed COVID-19 medical treatments and vaccination.

Chinese officials and the WHO have discussed COVID-19 medical treatments and vaccination. Photo: Getty

China’s hardline response to the virulent COVID-19 Omicron variant has global markets worried, with fears it could worsen already strained supply chains and heighten inflation.

As countries around the world are racing to relax their COVID restrictions and abandon ‘zero COVID’ policies, China continues to battle the pandemic with strict public health measures including lockdowns, quarantine and frequent testing.

More than 40 Chinese cities are in total or partial lockdown.

Tough coronavirus measures in Shanghai have resulted in many of the city’s 25 million people confined indoors for more than a month, some sealed inside fenced-off residential compounds, and many struggling to secure daily necessities.

The Chinese capital, Beijing, has not locked down, but many restaurants and stores are closed and some apartment blocks have been sealed. A mass testing of millions of residents is planned for this week in a bid to locate and isolate infections.

China lockdown

Shanghai has been under strict public health orders for more than a month. Photo: Getty

Outside China, the strict measures threaten to take a toll on the global economy, with COVID quarantine forcing a high rate of factory closures and hampering attempts to ramp up strained supplies of manufactured goods.

Factory closures

Global firms including General Electric, chipmaker SK Hynix and automaker Mercedes-Benz warned that China’s strict COVID-19 curbs were intensifying supply chain disruptions and raising uncertainty about the business outlook.

China’s factory activity contracted at a steeper pace in April as widespread COVID-19 lockdowns halted industrial production and disrupted supply chains, according to China’s National Bureau of Statistics.

Electric vehicle maker Tesla on Wednesday flagged a temporary fall in production due to China’s measures, a week after revealing it had lost about a month of build volume at its Shanghai factory due to the shutdowns.

Analysts at global financial services group Nomura estimated in mid-April that 45 cities in China were under full or partial lockdowns, with the domestic economy facing a growing risk of recession.

The disruptions come as companies are already scrambling to keep up with soaring costs of everything from labour to raw materials, while the Russian invasion of Ukraine and related Western sanctions have driven up energy prices.

“Collectively, supply-chain issues, the Russia-Ukraine war and China COVID impacts adversely affected revenue in the quarter by about 6 percentage points,” General Electric CEO Larry Culp said this week.

Inflation pressures

According to shipping analytics firm Windward, 20 per cent of the world’s container ships are stuck at ports around the globe, with some 30 per cent of the backlog emanating from China.

In figures released in early April, Windward said the lockdowns in China had almost doubled the number of container ships forced to wait off the country’s coast.

Lars Jensen, CEO of shipping container industry consultants Vespucci Maritime, told Fortune magazine last week the full impact of China’s COVID policies would only become apparent later this month.

Bank of America analysts said in a note to clients on Friday that China’s lockdowns and subsequent closures were “another adverse supply shock for the global economy” that will weaken growth and extend the period of high inflation.

China pandemic

The lockdown has already slowed shipping from Chinese ports. Photo: Getty

The forecast was for the US market, but the situation is largely the same in Australia.

China COVID resurgence

The coronavirus first emerged in the Chinese city of Wuhan in late 2019 and for two years authorities managed to keep outbreaks largely under control with lockdowns and travel bans.

The fast-spreading Omicron variant has tested China’s ‘zero-COVID’ policy this year, an important one for President Xi Jinping, who is expected to secure a precedent-setting third leadership term.

China’s COVID policy looks increasingly bizarre to much of the outside world.

Many governments have eased restrictions, or thrown them off altogether, in a bid to “live with COVID” even though infections are spreading.

China has given no hint of deviating from its policy despite a mounting toll on the world’s second-largest economy, and the ripples of disruption travelling through global supply chains.

Authorities are tracking down close contacts of confirmed cases, warning them to stay at home and contact authorities, and calling on everyone to abide by lockdown rules.

China reported 7822 new COVID-19 cases on Sunday, down from 8329 a day earlier, the National Health Commission said on Monday.

-with agencies

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