China’s Strict Covid-19 Strategy Risks Slowing Economic Recovery as Delta Variant Hits

China’s Strict Covid-19 Strategy Risks Slowing Economic Recovery as Delta Variant Hits

Economists are lowering full-year growth forecasts as Beijing imposes tough measures to try to curb the highly contagious strain

Outbreaks of the Covid-19 Delta variant are threatening to slow China’s economic recovery and raising concerns about the costs of the country’s strict coronavirus containment strategy.

After quickly suppressing Covid-19 through mass-scale lockdowns last spring, Chinese authorities are now contending with new outbreaks in at least 17 provinces, according to the country’s National Health Commission. Daily new infections climbed to 143 on Monday, more than double the number from a week earlier, when the country saw its highest daily caseload in half a year.

While those numbers are extraordinarily small compared to the U.S. and other countries, China’s zero-tolerance strategy means authorities are responding with tough measures, including lockdowns of residential compounds and cancellations of public events. Economists say those steps are likely to have a significant impact on China’s growth if they don’t succeed in snuffing out the virus soon.

Last week, Beijing said it will postpone an annual international film festival and canceled several other large-scale events, including exhibitions. The capital on Sunday also suspended planes and trains from places with Covid-19 cases from entering the city.

In Nanjing, where the Delta variant was first detected in late July, the city’s 9.2 million residents went through testing within weeks.

Goldman Sachs Group and Morgan Stanley have cut their full-year growth outlooks for China to 8.3% and 8.2%, from 8.6% and 8.7% respectively, over the past week.

“The more transmissible nature of the variant and China’s Covid-zero approach indicate that economic impact is inevitable,” economists from Morgan Stanley wrote in a report last week.

If the Covid-19 resurgence does spread further, it could potentially strain China’s manufacturing output, leading to disruptions in global supply chains which have relied heavily on China to provide electronics, medical gear and other goods. A weaker Chinese economy could also diminish China’s appetite for imported goods, affecting growth in some other countries, especially across Asia.

Of particular concern to economists is the potential that Covid-19 outbreaks could dampen consumer spending, exacerbating what many economists have described as an unbalanced recovery that is overly reliant on exports to the U.S. and elsewhere.

Lockdowns triggered by the Delta variant will “deal a major blow” to China’s domestic consumption, said Tommy Wu, a senior economist at Oxford Economics. Close-contact businesses such as those in the tourism and catering sectors would be hit the worst, he added.

The research firm still expects China’s retail sales to grow by 8.5% in the third quarter from a year earlier, but that is down from an earlier forecast of 12%.

Traffic congestion tracked in 100 cities began to decline over the past week, while subway ridership in six large cities including Shanghai, Nanjing and Zhengzhou dropped 12% in early August compared with last year, according to data compiled by Goldman Sachs.

Ji Xiaoxiang, the owner of a hospitality company with dozens of vacation homes in China, said it had refunded deposits worth more than $150,000 as customers, mostly families with children, canceled bookings over the past two weeks.

While local authorities didn’t impose any restrictions on Mr. Ji’s operations, he said that many of his clients working for state-owned companies or government agencies were urged by their supervisors not to travel in coming weeks.

“The Delta variant has hit us much harder given nearly half of our revenue comes from bookings in the summer,” said Mr. Ji. “I’m not sure if we will make a profit this year.”

Dan Wang, chief economist at Hang Seng Bank China, said the latest outbreak could push up the unemployment rate among low-income earners, especially in rural China.

“As always, private small businesses are more vulnerable to the spread of the virus, which hurts job opportunities for low-income laborers,” she said.

China’s economy is still widely expected to grow by more than 8% this year and easily surpass the government’s 6% target. China’s central bank could also unleash more liquidity, including a potential cut in a key interest rate, to help blunt the effect of any further outbreaks.

Goldman Sachs said its forecasts assume the government will get outbreaks under control “in about a month,” and that the economy could rebound in the fourth quarter if that happens.

The question is what happens if the highly-contagious Delta variant proves more difficult to contain than previous outbreaks.

China’s vaccination rate still lags behind that of many developed countries like the U.S. While China has administered more than 1.79 billion vaccine shots to over 40% of the adult population, questions about the efficacy of Chinese vaccines against the Delta variant have increased.

Another concern among some economists is the risk that exports—China’s biggest strength over the past year—could weaken in the months ahead if Western shoppers spend more on services like restaurants and travel and scale back on consumer goods.

Data released over the weekend showed Chinese exports grew 19% in July from a year earlier, slightly below expectations. The official Purchasing Managers’ Index in July indicated that foreign demand for Chinese goods has softened as new export orders dropped to the lowest level since June 2020.

China’s manufacturing sector has appeared to be shielded from the Covid-19 outbreaks so far, as factories adopted a range of preventive measures last year, including coronavirus testing for employees. The Delta variant has hit manufacturing capacity in some Asian economies such as Myanmar and Vietnam harder, as local authorities imposed restrictions on output.

“China surely doesn’t want to be the source that drags on global supply chains,” said Mr. Wu of Oxford Economics.

Still, if infections can’t be brought under control soon, some factories could be affected. Chinese carmakers could see sales disruptions in August as the virus reaches automotive production hubs, the China Passenger Car Association said Tuesday.

Most economists expect China to keep resorting to restrictions whenever cases appear, even as the U.S. and other Western economies keep businesses open and learn to live with the virus.

Gao Qiang, China’s former health minister, argued that China shouldn’t give up on strict controls and avoid the mistakes of lax containment strategies adopted by the U.S. and U.K., according to an article published by a health-news app run by the official People’s Daily last week. His comment came after Zhang Wenhong, a leading epidemiologist in the country, suggested that China will need to live with coronavirus as the pandemic is unlikely to end soon.

“It is absolutely unfeasible to ‘coexist with the virus,’” Mr. Gao wrote in the article. “We must always tighten the string of virus prevention.”

Many people, however, worry more about restrictions than the risk of infection.

Shen Meng, who runs a boutique investment bank in Beijing, canceled two business trips since late July as well as summer vacation plans to the northern Hebei province.

“Right now the policies are highly uncertain. I’m worried that once I leave Beijing, I may not be allowed to come back,” he said. es un sitio web oficial del Gobierno Argentino