Why China will likely recover more slowly from the latest Covid shock
As Shanghai tries to reopen businesses, one downtown district over the weekend banned residents from leaving their apartment complexes again for mass virus testing. Pictured here, in another district on May 21, 2022, is a line outside a shopping mall.
Xu Kaikia | Visual China Group | Getty Images
BEIJING — China’s economy won’t be snapping back quickly from the latest Covid outbreak, many economists predict.
Instead, they expect a slow recovery ahead.
When the pandemic first hit in 2020, China bounced back from a first-quarter contraction to grow in the second quarter. This year, the country faces a far more transmissible virus variant, overall weaker growth and less government stimulus.
The latest Covid outbreak that began in March has hit the metropolis of Shanghai the hardest. About a week ago, the city announced plans to emerge from lockdown — and fully reopen by mid-June.
“For China, the main story here is we have seen the light at the end of the tunnel. The worst of supply chain dislocations in China from Covid lockdown looks to be over,” Robin Xing, Morgan Stanley’s chief China economist, said during a webinar Friday.
“But we also think the road to recovery will likely be slow and bumpy,” Xing said.
It’s a process of fits and starts. Over the weekend, a downtown Shanghai district again banned residents from leaving their apartment complexes to conduct mass virus testing. More parts of the capital city of Beijing ordered people to work from home as the local daily case count rose — reaching 83 on Sunday, the highest for the city’s latest outbreak.
Case in point: German automaker Volkswagen, which has factories in two of this year’s hardest-hit regions, said Wednesday its China production sites were up and running, but Covid controls were disrupting supply chains.
The automaker said it was unable to provide a specific figure on production levels as the factories are joint ventures operated with local partners.
Although the national Covid case count has fallen over the last month, pockets of new cases ranging from Beijing to southwest China have prompted stay-home orders and mass testing. Freight volumes remain below normal.
“Many regions and cities have tightened restrictions at the first sign of local cases,” Meng Lei, China equity strategist at UBS Securities, said in a note last week.
“Our case studies of Shanghai, Jilin, Xi’an and Beijing show logistical and supply chain disruptions are the biggest pain points that affect production resumption,” Meng said. “Therefore work resumption is likely to be gradual rather than happening overnight.”
A policymaking cycle ‘interrupted’
The Chinese government has stuck to its stringent policy of “dynamic zero-Covid” despite this year’s emergence of the highly transmissible omicron variant.
The “most significant impact” of the Covid resurgence is that it “interrupted” the normal policymaking schedule, said Dan Wang, Shanghai-based chief economist at Hang Seng Bank China.
She said the latest wave of cases and lockdowns really only started after the central government released its annual economic plan at the “Two Sessions” parliamentary meeting in March.
In China’s heavily managed economy, this annual…
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