The Covid-19 variant has been popping up across China in recent days, including major port cities like Dalian and Tianjin, prompting restrictions that could disrupt business operations in those places. The rest of the world also deals with Omicron, but China is different due to the authorities’ desire to prevent any widespread outbreaks by locking down cities and restricting travel.
The strict approach has so far been effective: China has seen far fewer Covid-19 cases than many other countries during the pandemic, and its economy was the only major one to grow in 2020.

Omicron, however, threatens to expose serious flaws in this plan. The variant is much more transmissible than the others, which makes it difficult to contain. And as the rest of the world learns to live with the virus, economists say China’s zero-tolerance strategy is likely to do more harm than good in 2022.

Goldman Sachs, for example, comes cut its Chinese economic growth projection in 2022 to 4.3% from 4.8%. That’s about half of what they estimate to be last year’s growth rate. (China will release fourth-quarter and full-year GDP figures for 2021 on Monday.)

These revisions come “in light of the latest Covid developments – in particular, the likely higher average level of restriction (and therefore economic cost) to contain the most infectious Omicron variant,” Goldman analysts wrote in a Tuesday report. research note.

Morgan Stanley takes a similar view that Omicron could mean the costs of a zero-Covid approach outweigh the benefits. Last the week its analysts forecast 4.9% growth in the first quarter, but suspect it could slow to 4.2% “if Omicron expands to other regions and results in multiple citywide shutdowns” .

Analysts cited ‘deeper service disruption’ as a major risk for China, if the country expands containment measures in several cities. It would mark China’s most serious and widespread attempt to contain the coronavirus since April 2020, when it lifted its massive lockdown on Wuhan, the original epicenter of the virus.

Threats to supply chains

In addition to the country’s precarious service sector, which is already struggling due to sporadic Covid outbreaks and anti-virus measures, Omicron could deal a blow to factories and supply chains, compounding the economic threat.
An outbreak of the older Delta variant forced the industrial hub of Xi’an into lockdown earlier this year, affecting production lines for global chipmakers like Samsung (SSNLF) and Micron (MU).

And then there are the cases of Omicron detected in major port cities. Ship congestion at Chinese ports has worsened recently as more cities implement strict Covid restrictions due to outbreaks, or tighten testing policies ahead of the Chinese holiday season. Chinese New Year from January 31.

The Shekou Terminal in Shenzhen, for example, has started restricting truckers bringing in loaded containers. From Friday, truckers can only enter the terminal if they have reservations for containers for export on ships arriving within three days, the operator said in a statement this week.

The restrictions echo those of last year, when several Chinese ports were briefly closed after infections were discovered among dockworkers. These problems have created backlogs of containers waiting to depart and ships waiting to dock – and added pressure to strained global supply chains.

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So far, there does not appear to have been any lasting impact on trade. Customs data released on Friday showed exports jumped 21% in December from a year ago, beating expectations. The country’s trade surplus was $676 billion in 2021, an all-time high.

This indicates that China’s strategy might actually help: export orders may have been transferred to China from other developing countries due to “Omicron’s damage to the global supply chain” , according to Zhiwei Zhang, chief economist for Pinpoint Asset Management.

Even so, there are risks – especially if China imposes a nationwide lockdown.

“Although the latest wave of the virus in China does not appear to have hurt exports much in December, media reports of increasing virus-related congestion and delays at a number of major Chinese ports since the start of the year,” wrote Julian Evans-Pritchard, senior China economist for Capital Economics, in a Friday research note. “With cases emerging in even more port cities in recent days, including Dalian and Shanghai, the situation is likely to worsen in the short term, leading to lower shipments this month.”

Staying the course, at a price

China should not abandon its zero-Covid approach for a while. One reason: The country’s Sinovac Covid-19 vaccine isn’t as effective as others against the variant, according to recent reports.

“The population has virtually no antibodies against Omicron,” Eurasia Group executives wrote in a report released earlier this month. “Keeping the country locked down for two years made it riskier to reopen it.”

Apart from worries about the health of its population, a handful of important upcoming events will likely persuade Beijing to stay the course.

The country is hosting the 2022 Winter Olympics in February, making Omicron containment important in the short term. Chinese President Xi Jinping is also set to seek a historic third term when the Chinese Communist Party holds its 20th Party Congress in the second half of this year, underscoring the need for stability in the meantime.
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Still, the economic cost of containing an aggressive variant could be high. Nomura analysts wrote this week that retail sales and other services could be hit hard if there are more lockdowns, adding that the benefits of zero-Covid are “likely to diminish as costs rise”. They predict GDP growth of 2.9% for the first quarter and 4.3% for the whole of 2022.

Eurasia Group Chairman Ian Bremmer and Chairman Cliff Kupchan, meanwhile, have called the failure of China’s zero-Covid policy the top global geopolitical risk for 2022, suggesting a blackout could lead to larger outbreaks. , tougher lockdowns and greater economic disruption.

“This is the opposite of what Xi Jinping wants his country to be as it nears its third term, but there is nothing he can do about it,” they wrote in their forecast this month. “The initial success of zero Covid and Xi’s personal attachment to it make any change of course impossible.”