China’s zero-COVID policy may have limited virus-related fatalities to under 6000 out of a total populace of 1.4 billion, but the stringent measures haven’t come without their drawbacks. China has locked down complete cities at the first notion of a new outbreak and closed its borders for nearly two years. Mass testing, contact tracing, and some of the strictest pandemic policies in the world rule China, and these drastic steps are creating major concerns for global stock markets.
Chinese Industry In Chaos In Preparation Of The Olympics
There’s no denying just how overwhelmed China’s supply chains are. In certain industries, air freight is up by as much as 50%, while some shipping firms have shut down their services completely. Ports are open but restricted, and delays are the name of the day. Countless products are building up at ports, but ships are banned from entering. Many describe the state of supply chain management and logistics as utter chaos and much akin to what was experienced at the start of 2021.
New Year, Same Supply Chain Problems
As China clamps down on COVID-19 controls, the rest of the world is gripped by ongoing, prolonged supply chain issues. Ports, factories and entire cities are shut down at the drop of a hat creating sudden and difficult to navigate bottlenecks and massive price hikes due to delays and escalating shipping fees. Just look at how the third busiest port on Earth, Ningbo-Zhoushan, was immediately closed after one employee contracted COVID-19. Global shipping and manufacturing operations are stifled. The erratic supply chain tension has even led to analysts like Goldman Sachs downgrading China’s economic growth forecast to just 4.3%
Repercussions Of China’s Zero Tolerance
China’s zero-tolerance to infections supports rising inflation and will, without a doubt, lead to more aggressive global interest rate hikes. There’s no denying just how much the country’s manufacturing capacity is impacted. To make matters worse, as the nation prepares to host the Winter Olympics, many fear that it won’t only be the short lockdowns that supply chains have begun to manage relatively well but extended periods and larger areas. This would mean grossly long transportation delays and widespread component shortages that are even worse than presently suffered.
Zero-COVID Policy Straining Currency & Commodity Growth
Canadian investment banking giant BMO Capital Markets is one of the many who feel the analytics reveal constrained commodity prices and limited currency growth directly due to China’s zero-COVID policy. As growth stocks suffered during the start of 2022, commodity prices skyrocketed. Unfortunately, commodity-based currencies haven’t felt the full effect of the rally thanks to the shockwaves of China’s hungry demand for raw resources and the frustrating supply and demand lockdowns.
A Burden To The World And The Chinese Economy
While the zero-COVID policy did initially contain some infections in China, the restrictions are currently a burden to the Chinese economy, China as a supply source to the rest of the world, and global economies. Equity markets in 2022 will be experiencing low global bond yields thanks to the way that China is being forced to recycle its trade surplus. Furthermore, with economies globally focused on a strong dollar, interest rates are likely to rise. However, the Chinese Renminbi will be unaffected for the entire year.
All Agree, China Needs Change, But When?
The International Monetary Fund and global authorities within finance unanimously agree that it’s only a matter of time before China will have to reel in its zero-COVID policy. How long China will manage to keep things under wraps is uncertain, but for now, subdued Chinese consumption and the lack of tourism is pushing the country towards below its GDP trend rate for 2022, which limits commodity demand. The only minor upside is that China’s strict virus controls and containment measures are turning the country’s local institutional investors towards buying US treasuries.
Note: Please do not invest money or assets in the financial markets that you cannot afford to lose. This article should not be construed to be investment advice and is for information purposes only.