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How the delta variant could actually help the economy

By Laura He, CNN Business

China’s worst coronavirus outbreak in a year leads authorities to take dramatic measures to stamp out new infections. But while city lockdowns, flight cancellations and trade suspensions can bring the virus back under control, those measures run the risk of stalling an already precarious recovery.

The country’s recent fighting began when the delta variant of Covid-19 swept through China in late July, quickly spreading to more than half of the 34 provinces and regions, and leading to more than a thousand confirmed cases.

While the number of cases remains low compared to the recent flare-ups in the US and Europe, China has aggressively revived its “zero covid” strategy.

It has isolated some cities, closed entertainment venues, canceled flights and instituted mass testing to contain the spread – measures not seen on this scale since the pandemic began last year. Some trading at a large container port near Shanghai was even suspended this week after a worker tested positive for the virus.

These drastic steps have already led some economists to cut their growth forecasts for the world’s second largest economy.

Goldman Sachs analysts predict that China’s GDP will only grow by 2.3% quarter-on-quarter in the third quarter – dramatically lower than the originally expected increase of 5.8%.

“As the virus spreads in many provinces in China and local governments are reacting quickly to control the spread of the highly contagious Delta variant, we have begun to observe a weakening of the national aggregate data,” the analysts said in one earlier this week Research report, adding that they believe that services such as travel, catering and entertainment will be affected.

Despite the expected break-in In the third quarter, Goldman analysts expect a largely intact recovery this year. For the whole of 2021, they expect the Chinese economy to grow by 8.3%, slightly lower than an earlier estimate of 8.6%.

However, other economists are also warning of a slump in growth.

China has introduced “strict individual mobility restrictions” to better enforce its “zero tolerance” policy, JP Morgan analysts wrote in a research note earlier this week. You forecast economic growth to halve to 2% in the current quarter, compared to an earlier estimate of 4.3%. They also lowered their 2021 GDP growth forecast to 8.9% from 9.1%.

“We expect the situation can be brought under control in the next few weeks, but the disease control process will affect consumption and services for the time being,” they added.

Morgan Stanley analysts, meanwhile, slashed their GDP growth forecast for China to 8.2% in 2021 last week, and also said the outbreak would affect consumption growth and dent service sector attitudes.

Further disturbances are possible

Beijing is expected to release more information on the economic recovery on Monday – including consumption, industrial production and investment – which should provide further indications of China’s economic recovery.

These numbers are unlikely to be complete as they only cover the July dates and omit any impact from the virus in the first few weeks of August.

However, there has been other recent signs that the virus resurgence, along with the measures China is taking to contain it, could lead to disruption.

On Wednesday, the authorities closed the Meishan Terminal in the port of Ningbo-Zhoushan – the third largest container port in the world – after a dock worker tested positive for Covid, according to the local government. The port handles goods that would fill around 78,000 20-foot containers a day. The Meishan Terminal accounts for around a fifth of the port’s volume.

The problems there reflect a lockdown that the Chinese authorities imposed on Yantian in May, a critical port in southern China that can handle it 36,000 20-foot containers daily. Even after that port reopened in June, it ran under capacity for a period, creating a shipping backlog that will take weeks to clear.

“This was one of the immediate risks we saw in China as the pandemic situation worsened,” Nick Marro, chief global trade analyst for the Economist Intelligence Unit, said in a research note Thursday.

“The global trade and logistics environment is already in a rather fragile state, especially given all the challenges we faced in spring and early summer,” he added. “Trade disruptions not only pose problems for shipping and consumers, but also for manufacturers who rely on critical import components.”

Other challenges

Delta variant-powered locks aren’t China’s only problem right now.

In addition, the country is struggling with rising inflation and growing debt risks.

The producer price index – which measures the cost of goods sold to businesses – rose 9% year-on-year in July, reaching its highest level in almost 13 years in May. High producer inflation is worrying news for China’s businesses and the country’s economic recovery. This means that rising raw material costs are now more aggressively affecting companies’ profits, forcing them to control costs by slowing production or even laying off workers.

Debt risk is another problem. Chinese corporate bond defaults rose to 62.59 billion yuan ($ 9.7 billion) in the first half of 2021, the highest for the same period on record, according to Fitch Ratings.

A comprehensive regulatory crackdown on private companies that Beijing seeks to keep in check has also angered investors and shattered market confidence.

These recent regulations in sectors ranging from technology to finance to education have wiped out more than $ 1 trillion in market value of some of China’s most valuable companies, according to Goldman Sachs.

And JP Morgan analysts said cracking down, particularly in technology and education, “will not only disrupt the tutoring business, it will also lead to rising unemployment and a recovery in income growth.” They added that the ban in the country for-profit tutoring alone could affect millions of jobs.

The data showed that China’s borrowing has slowed dramatically over the past month. This indicates that businesses and individuals may be reluctant to invest or spend, which could lead to reduced employment, lower consumption and slower growth.

Chinese banks added only 1.08 trillion yuan ($ 167 billion) in new yuan loans last month, almost a decrease 50% as of June, according to the People’s Bank of China last Wednesday.

Larger funding, including loans from non-banks, totaled 1.06 trillion yuan ($ 164 billion) in July, also significantly less than June’s 3.67 trillion yuan.

According to analysts at Goldman Sachs, the slowdown likely reflected “weak credit demand amid tightened regulations” for real estate, consumer credit and local governments’ ability to borrow.

The CNN Wire
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