Many countries around the world have decided to live with the coronavirus, even as a new subvariant fuels another wave of infections. But China is an extremely important exception.
What’s happening: China continues to deploy “snap” lockdowns as it tries to eliminate transmission of Covid-19 within its borders. The policy is hanging over the outlook for the global economy and financial markets, presenting more unknowns as investors scramble to assess the impacts of the war in Ukraine and surging inflation.
Starting Monday, around 11 million residents in the eastern half of Shanghai will be banned from going out for four days as mass testing kicks off. The staggered lockdown will then move to the other half of the city, which has about 14 million residents, beginning Friday.
Market reaction: The announcement sent global crude prices down sharply, as traders bet that the restrictions would reduce demand from a top consumer. China imports about 11 million barrels of oil per day.
Stocks are holding their ground, however. The Shanghai Composite Index ended Monday almost 0.1% higher. The Shanghai Stock Exchange remained open, and said it would offer online services for firms that want to go through the process of listing shares.
How vital is Shanghai? The lockdown in Shanghai is a big deal not just because of the city’s scale, but also because of its deep financial and economic links.
Shanghai accounts for about 4% of China’s economic output, according to Larry Hu of Macquarie Capital. But because it’s a “major hub of the Chinese economy … the indirect impact could be substantial as well,” he told clients.
The lockdown, and uncertainty about what Beijing will do next as it maintains its fierce fight against the virus, is a threat to China’s economic growth target of about 5.5%, already its lowest in three decades.
“China should be able to contain the virus in the next few weeks, as lockdown is effective,” Hu said. “But Covid does pose substantial growth risk in the rest of this year, as lockdown is very costly.”
Consumer spending and China’s real estate sector, which was already under serious pressure, are likely to bear the brunt of the pain.
On the radar: Outside China, the big question is whether manufacturing and shipping will be affected, adding to strain on global supply chains and further boosting prices.
Shanghai’s main ports are operating normally, according to state media. And during a lockdown in the southern Chinese city of Shenzhen earlier this month, manufacturers shifted operations to other parts of their network to limit the impact of the temporary rules.
“The impact on manufacturing activities will likely be manageable, especially if such lockdowns are short and sporadic,” economists at Bank of America said in a recent research note.
But there will still likely be disruptions. News outlets are reporting that Tesla will suspend production at its Shanghai factory for four days.