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Tuesday, January 18, 2022

China’s zero-Covid strategy hurts consumer spending more than manufacturing

Residents queue for mass COVID-19 testing in Tianjin on January 9, 2022, after the municipality reported 20 news cases over the weekend.

Feature China | Future Publishing | Getty Images

BEIJING – China’s zero-Covid policy to control the pandemic affects consumers more than factories, economists say.

As local authorities impose more travel restrictions and some lockdowns to contain the Omicron Covid variant, analysts are becoming cautious on China’s economy. Goldman Sachs on Tuesday cut its growth forecast for the year.

But analysts focused on the impact of China’s already sluggish consumer spending.

Omicron’s high transmission efficiency means the costs of China’s zero-Covid policy are rising, while the benefits are falling, Nomura’s chief China economist Ting Lu said in a report on Monday. He mentioned how in hospitality, business has not yet reached pre-pandemic levels and industry workers can save and spend less.

Manufacturing was not on the cost list.

On the positive side, “the zero-Covid strategy, as well as Beijing’s ability to mobilize all of the country’s resources, has arguably brought significant benefits to its people and economy, with the official death toll of only four since mid-April 2020, The factories have started firing.All cylinders, and an impressive 31.0% [year-on-year] Export growth in the first eleven months of the year,” Nomura’s Lu said.

Since the pandemic began in early 2020, China’s policy has used quarantine and travel restrictions to control the outbreak – whether within the city or in conjunction with other countries. After a contraction of the first quarter, the country became the only major economy to grow that year.

According to an analysis by Dan Wang, Shanghai-based chief economist of Hang Seng China, hotels and restaurants have been most affected by the zero-Covid policy. Their study found that manufacturing and agriculture were the least affected and contributed the most to development.

Wang’s analysis compared GDP figures in 2020 and 2021 to a four-year average of China’s annual GDP growth rate between 2016 and 2019 before the pandemic.

“By stopping the spread of Kovid, China [has] It is able to ensure that all nodes along the supply chain work so that in fact both agricultural and industrial production … exceeds trend price,” she said in a phone interview last week.

Industrial production grew by 2.8% in 2020 and 10.1% in the first 11 months of 2021 from the same period a year ago. China’s factory activity unexpectedly increased in December, according to an official measure called the Purchasing Manager’s Index.

Why factories are less affected

While China’s economy faces many challenges, from rising commodity prices to cracking down on the real estate industry at large, economic data indicates resilience in factory production.

In China, manufacturers are less affected by city lockdowns because factories are usually spread out in suburban industrial parks, where workers live in dormitories, said Yu Su, chief economist at The Economist Intelligence Unit.

She noted that last summer, Apple supplier Foxconn was able to maintain production at its factory in Zhengzhou, Henan, despite the historic floods that killed more than 300 people in the province.

Su expects that different local government approaches to implementing the zero-Covid policy will result in different economic performance by province this year.

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“For example in Shanghai, when there is a positive case, they will just shut down the district or the street,” she said. “But for governments that have limited health care resources[s], they immediately shut down the whole city, just like they did in Xi’an.”

Xi’an in central China is one of the country’s many industrial centers. The city’s lockdown since late December of the city of 13 million people contributed to city chief China economist Li-Gang Liu’s expectation that industrial output could grow 3.5% year-on-year in December, up from 3.8% in November.

But Liu expects China’s trade growth to “remain strong” despite the high base of the past two years.

More than half of China’s goods manufactured for export come from Guangdong, Jiangsu and Zhejiang provinces on the south or southeast coast near Shanghai. Least Developed Areas The country of 1.4 billion people is located in the central and western parts of China.

China’s export growth remained resilient throughout 2021, despite several warnings of slowing overseas demand.

The risk this time is that factories in other countries could operate if their governments decide to pursue a strategy of coexistence with COVID.

China’s “zero-Covid policy on one hand may ensure retail activity, industrial activity can continue, but only if the world succeeds in a ‘living together’ way”. [the] Virus, ‘China could risk development divergence between the two,’ said Gary Ng, Asia-Pacific economist at Natixis.

political risk

Analysts expect China to stick to a zero-Covid policy by the end of this year because of politically significant events, from the Beijing Winter Olympics in February to a meeting of the Chinese Communist Party’s leadership expected to decline.

This puts increased pressure on local government leaders, who are often fired following an increase in COVID cases in their city.

The strict policy has become politically sensitive in other ways. US-based consulting firm Eurasia Group on January 3 named China’s failure to achieve zero-Covid as the top risk for 2022, necessitating more severe lockdowns and adding to supply chain disruptions. Chinese state media sharply criticized the report with English-language opinion pieces and a cartoon.

Officials are also concerned about the country’s already tight hospitalization capacity.

China’s Centers for Disease Control and Prevention published a study in November saying changes to other countries’ co-existence strategy would lead to hundreds of thousands of new daily cases and ravage the national medical system.

Read more about China from CNBC Pro

The Omicron Covid variant that emerged in late November is a heavily mutated version of the coronavirus that is highly transmitted.

Preliminary reports indicate that Omicron may be less lethal than other COVID strains. But the World Health Organization said on Tuesday that Omicron could result in life-threatening illness for the unvaccinated, the elderly and people with underlying conditions.

Mainland China on Wednesday reported 124 new, locally transmitted cases for a total of 3,460 existing cases – and no new deaths. New cases in Xi’an city fell to six from 63 a week ago. According to Reuters, in the US, there are an average of 1,700 deaths from Kovid, while a record 132,646 people died from hospitalization as of Monday.


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