Covid is still a big problem for China – and it’s a problem for the global economy | Chinese economy

For much of the world, there has been hope for some time that the worst economic shocks of the Covid pandemic are in the rearview mirror. In China, however, there are important indications that risks to the global economy remain.

Three years after the virus first spread, protests in several Chinese cities against the Beijing government’s strict zero-Covid policy have reignited concerns in financial markets about the economic cost of the pandemic. Global oil prices have fallen, while the Chinese yuan and stock markets across Asia have come under pressure.

Daily new Covid cases have continued to rise, surpassing the peak levels recorded earlier this year during the strict lockdowns in Shanghai. With the continued use of strict controls to contain outbreaks, the patience of China’s 1.4 billion people seems to be about to be tested. Although Beijing announced “20 measures” to ease its zero-Covid approach earlier this month, it has not been smooth sailing.

The key unknown is how long the protests will last and how Beijing will respond. What is clear is that whatever the authorities do, the economic prospects for China are dire.

“Adhering to zero-Covid would require strict local lockdowns in areas where outbreaks are occurring: currently these areas generate nearly two-thirds of China’s GDP,” said Mark Williams, chief economist for Asia at consultancy Capital Economics.

If the restrictions were lifted quickly, the Chinese health system could be overwhelmed. This, in turn, could lead to a strict national lockdown with an economic impact similar to that seen in early 2020, he added.

Covid cases in China

As one of the biggest buyers of natural resources to power its industrial sector, the prospects of lower demand in China — as a result of lockdowns or ongoing political unrest — could weigh on the world’s second-largest economy. These are some of the reasons why global commodity prices have fallen back.

But while falling oil prices — at a time of sky-high energy costs — could help moderate the worst inflationary storm in decades, there are other headwinds to consider.

China has played an increasingly central role in global supply chains over the past 30 years of economic liberalization, ensuring that lockdowns affecting the country’s vast industrial base have major international repercussions. This was illustrated by the inflationary shock that gripped Western nations – after demand for manufactured goods outpaced constrained supply chains as factories grappled with significant delays in shipments from Asia, shortages of key components and sky-high freight costs.

Vladimir Putin’s invasion of Ukraine compounded the shock, sending inflation to decades-highest levels and pushing a third of the global economy into recession – including the UK, several eurozone countries and possibly the US.

There were hopes that the worst of the supply shortages were beginning to unwind, including at the Bank of England, where this is part of the reasoning behind forecasts for a sharp fall in inflation over the next year.

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While the prospect of prolonged recessions in the UK and elsewhere will limit demand for goods and services – helping to ease inflationary pressures – the likelihood of harsh new lockdowns in China and renewed supply chain problems could push in the opposite direction.

Big global investors have recently bet that inflation in advanced economies is near or even at a peak, which could allow central banks to ease their tough rate-hike measures. European equities have rallied about 20% since early October amid hopes of a US Federal Reserve move away from sharply rising borrowing costs.

“What’s happening in China reminds us that Covid is still a really big problem in the world’s second largest economy,” said Ian Stewart, chief economist at accounting firm Deloitte.

With a global economy still reeling from a series of economic shocks, another one is in danger of happening.