China: Increasing Headwinds for the Economy
The escalation of China’s zero COVID strategy following the Omicron outbreak is creating additional headwinds for the Chinese economy. The COVID situation in China has significantly deteriorated over the past month with daily average cases rising from less than 200 new cases per day to over 25,000 new cases currently. To stem the tide, local governments broadened what had been very localized restrictions, to full lockdowns of major cities. This includes Shanghai, China's financial and logistics hub, with a population of 25 million. Cross-regional travel is restricted and government officials have taken steps to criminalize lockdown violations. From a perspective of global growth, these measures contribute to logistical delays and longer delivery times leading to further disruption in global supply chains.China’s growth momentum, which had begun to wane in H2 2021 driven by both demand and supply shocks, has weakened further, with the latest survey lead indicator the Purchasing Managers' Index (PMI) at two-year lows. Recognizing that global and domestic economic uncertainty has increased, China’s State Council Committee announced an acceleration of growth stabilizing measures to support the real economy and to lower financing costs. While DBRS Morningstar expects additional domestic policy support in response to a sharp slowdown and there are sufficient buffers, the domestic property market dynamics and the uncertainties in the international environment will make engineering a soft landing a tough task.
Key Highlights
• Escalation of Zero Covid policies is disrupting production with China’s March PMI reading at the lowest level in two years.
• Restrictions on cross-regional travel are interrupting domestic logistics which combined with reduced port operations could further disrupt regional and/or global supply chains.
• The challenges facing China are increasing, but sufficient buffers exist to prevent a severe slowdown/financial instability.
“The escalation of China’s zero COVID strategy following the Omicron outbreak is creating additional headwinds for the Chinese economy and is spilling over to regional and global supply chains,” says Rohini Malkani, Senior Vice President, DBRS Morningstar. “The situation is more complex than in the past and the dynamics in the domestic property market and in the international environment may make it more difficult for China to engineer a soft landing, but China’s economic and policy buffers remain sufficient to limit the risk of an abrupt near-term adjustment,” continues Ms. Malkani.
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