China’s new Covid lockdowns are another another economic threat

The global economy is being roiled by Russia’s war in Ukraine, as authorities scramble to bring soaring inflation under control. However, China’s response to the country’s greatest Covid-19 outbreak in two years serves as a warning that the conflict isn’t the only threat to the recovery. Even as many other countries realise it’s time to learn to live with the virus, the world’s second-largest economy is pressing ahead with its “zero-Covid” plan.

Shenzhen, a major electronics hub, has been placed on lockdown for a week after 66 positive cases were reported on Saturday. Except for those considered essential, all firms have suspended operations or instituted work-from-home policies. Following an increase in cases, Shanghai, China’s main economic centre, has taken tight precautions, including halting schools and movie theatres and banning travel into the city.

One of Apple’s largest suppliers, Foxconn, has halted operations in Shenzhen, where it operates two main campuses. The date factory work will resume will be “recommended by the local government,” it announced Monday. The Taiwanese firm claimed it has relocated manufacturing to other locations to “minimise the possible impact” of the outage, but didn’t say which ones would take on extra work.

Uncertainty surrounding Foxconn’s production is one indicator of how China’s response to the increase in coronavirus infections will have a global impact. On Sunday, there were 2,125 local cases in 58 locations around the country. Lockdowns in China could drive up container shipping rates, which are already at an all-time high, and disrupt global supply chains that are currently dealing with pandemic-related delays.

“If a case is discovered in the Yantian port [in Shenzhen], the port might be closed for at least two weeks,” ING economists warned investors on Monday. “This will have an impact on electronic parts and commodities exports and imports.”

This could exacerbate inflation. A new wave of Covid limitations could have an impact on domestic spending, which is a key driver of the country’s GDP.

“This is without a doubt China’s worst viral scenario since the Wuhan shutdown,” Commerzbank economists Hao Zhou and Bernd Weidensteiner warned on Monday. China’s growth projection for this year was already the lowest in three decades, at around 5.5 percent. In 2021, the country’s economy grew by 8.1 percent, although the rate of expansion slowed dramatically in the closing months of the year.