What China’s zero-COVID troubles mean for global economic growth

China’s strict zero-COVID policy complicated the global economic recovery.

The country has tried to eliminate all cases of COVID-19, but three years later, frequent lockdowns and strict quarantine guidelines have led to food shortages, delayed health care, and mental health struggles.

The ongoing frustrations among citizens reached a boiling point on Nov. 24, when protests erupted after a fire broke out in an apartment building in the city of Urumqi, killing 10 people during the city’s 100-day-long lockdown. Since then, large-scale protests have emerged in major cities across China such as Shanghai, Beijing, and Wuhan, leading Chinese officials to loosen some of the country’s COVID rules.

Despite some easing, foreign investors in China are worried about the economic position of the country. On Nov. 28, following the first wave of protests, stock exchanges globally closed lower. Apple (AAPL) was down 2%, and crude oil prices fell to an 11-month low.

“It has a huge impact on economic growth when large parts of the country continue to exist under various forms of lockdown,” Dane Chamorro, head of global risks and intelligence at Control Risks, told Yahoo Finance (video above). “China is absolutely key for global growth.”

An epidemic control worker wears PPE as her face shield is fogged up in the cold while waiting outside a community in COVID-19 lockdown on December 2, 2022 in Beijing, China. (Photo by Kevin Frayer/Getty Images)An epidemic control worker wears PPE as her face shield is fogged up in the cold while waiting outside a community in COVID-19 lockdown on December 2, 2022 in Beijing, China. (Photo by Kevin Frayer/Getty Images)

An epidemic control worker wears PPE as her face shield is fogged up in the cold while waiting outside a community in COVID-19 lockdown on December 2, 2022 in Beijing, China. (Photo by Kevin Frayer/Getty Images)

Even with restrictions loosening, local governments within the country are now under pressure to conduct mass testing and enforce quarantine policy where necessary. Many of these cities are already starting to run out of cash, according to CNN Business, which puts a financial drag on the country’s overall financial health.

“When the Chinese economy shrinks 1%, the global economy shrinks about half a percent, but then there are major countries that are major trading partners and suppliers to China — countries like Indonesia or Chile, [and] usually they’re supplying raw materials,” Chamorro said. “When China shrinks by 1%, they shrink almost a full percentage point.”

Business risks

The “Made in China” trademark may no longer be the symbol of international trade it once was.

Influential multinational giants like Apple and Tesla (TSLA) have some of the largest manufacturing hubs in China. Due to the social unrest, however, Apple is set to produce 6 million fewer iPhones after factory workers at the Foxconn facility in Zhengzhou protested against the handling of the outbreak and payment delays.

“This is one of the rare miscues on Apple,” Keith Fitz-Gerald, a private investor told Yahoo Finance, explaining that COVID protests in China were creating more doubt and uncertainty for investors.

However, companies like Apple could make a manufacturing comeback in Vietnam, Thailand, India, and even in the U.S. By the end of this year, Apple is expected to move 5% of its iPhone 14 production to India as Foxconn explores manufacturing opportunities there, according to JPMorgan.

China was the world’s second-largest recipient of foreign direct investment (FDI) in 2021, with nearly $179 billion pouring into the country, but China’s current investment outlook is bleak. Although China’s markets are more open than a decade ago, the FDI market openness index for China is still below 1, as China’s government remains heavily involved in financial institutions, banking, and private firms, according to a report by the Atlantic Council.

Stephen Roach, an economics professor at Yale University, foresees “ongoing impacts” to the Chinese economy and, consequently, the global economy.

“The numbers I saw suggest that the current wave of lockdowns is impacting areas that account for about 25% of Chinese GDP, which is higher than last April during the Shanghai-focused lockdowns,” Roach told Yahoo Finance. “This has consequences for near-term Chinese growth prospects with knock-on effects around the world.”

According to Roach, the economic reopening in China depends on the spread of the Omicron variant. Now, the companies that relied on China’s “low-cost, highly efficient off-shore production platform are in the process of rethinking” their presence in China, he said, which is not only a result of the COVID outbreak but also of U.S.-China tensions related to China’s strategies with Russia.

“You can’t put all your eggs in one Chinese basket anymore,” Roach said.

Supply chain issues cause more uncertainty

Investors are also worried about human rights violations and production targets in China.

Zero-COVID measures gave little ease to the supply chain bottlenecks passed on since 2020, and now with COVID protests, inconsistent production could continue. This could prolong high inflation that could settle at 4% — instead of the Fed’s goal of 2% — according to economist Mohammed El-Erian.

Apple’s supply chain disruption is one of many. China exports $2.65 trillion worth of products worldwide with most of those exports coming to the U.S. This web of global trade has left most European countries and the U.S. heavily reliant on China, which has become the ultimate “trade titan.”

As a result, changes in China could help determine whether the U.S. enters a recession head-on.

“The supply chain issues a lot of these corporations are experiencing are going to hit their bottom and top lines in the short-term period,” Saruhan Hatipoglu, CEO of Business Environment Risk Intelligence, told Yahoo Finance. He added that there’s already an impact on consumers that will likely get worse, especially at a time when consumer confidence has been at its lowest level since July at 100.2.

China could fully reopen by mid-2023, according to a Bloomberg economist, but until then, the social turmoil, lack of market openness, supply chain issues, and the government’s role in managing the virus will keep investors on edge.

“We have to watch what is happening in terms of implications on supply chain, implications on geopolitical tensions between the U.S. and China,” Tarek Robbiati, CEO of HPE, said in an interview with Yahoo Finance.

The next steps

Moving forward, economists are unsure of what’s next for China’s economy and the global economy.

Last month, Goldman Sachs raised its forecast for China GDP to 4.5% for 2023, citing the country’s reopening, while Barclays trimmed its forecast to 3.8%.

International Monetary Fund (IMF) Managing Director Kristalina Georgieva acknowledged the downside risks to China’s economy as a result of its zero-COVID policy. Currently, the IMF is projecting that China’s GDP will expand by 3.2% in 2022 and 4.4% in 2023.

People wearing face masks ride an escalator past office towers in the Lujiazui financial district of Shanghai, China October 17, 2022. REUTERS/Aly SongPeople wearing face masks ride an escalator past office towers in the Lujiazui financial district of Shanghai, China October 17, 2022. REUTERS/Aly Song

People wearing face masks ride an escalator past office towers in the Lujiazui financial district of Shanghai, China October 17, 2022. REUTERS/Aly Song

“There is indeed the possibility that in this time of very high uncertainty, we might have to revise these projections down,” she told reporters on Tuesday.

On a global scale, meanwhile, the Organization for Economic Cooperation and Development (OECD) is projecting economic activity to expand by 3.1% in 2022 and just 2.2% in 2023.

“It is true we are not predicting a global recession,” OECD Secretary-General Mathias Cormann said at a press conference. “But this is a very, very challenging outlook, and I don’t think that anyone will take great comfort from the projection of 2.2% global growth.”

Tanya is a data reporter at Yahoo Finance. You can follow her on Twitter @tanyakaushal00.

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