Advertisement
Coronavirus China
OpinionComment
Andy Xie
Andy Xie

Opinion | How China’s zero-Covid policy is tipping the world into recession

  • Persistent lockdowns and hardening political rhetoric suggest China’s zero-tolerance approach to Covid-19 will remain over the long term
  • Collapsing demand, falling middle-class income, supply chain disruptions and a weakening yuan will have consequences that ripple across the globe

Reading Time:4 minutes
Why you can trust SCMP
83
Illustration: Craig Stephens
Andy Xie

China’s domestic demand is dramatically contracting under the weight of its zero-Covid measures. As lockdowns persist and spread, the extraordinary decline in domestic demand is likely to trigger a global recession.

Advertisement
While reduced Chinese demand for commodities might ease inflationary pressure, the supply chain disruption will more than offset that and keep up the pressure on major central banks to continue raising interest rates into a recession. The world remains on a dual track of real economy inflation and asset deflation.
China’s auto sales fell 48.1 per cent year on year in April, and property sales at China’s top 100 developers were down 58.6 per cent year on year. It is apparent that domestic demand has crashed as Covid-19 lockdowns spread. As more areas get shut down, the May figures could be considerably worse.
With political rhetoric on zero-Covid becoming more rigid, the policy is likely to remain in place for some time. The Omicron variant could easily return, even if case numbers come down to zero, or near zero. Therefore, Beijing has to severely restrict mobility to keep it down over the long term, as some cities in northeast China have experienced for the past six months, and any rebound in domestic demand is a long way off.

China accounts for a big chunk of global growth. It has been the most important driver for multinational companies in holding down production costs and a major source of profit growth from sales to the Chinese middle class. For global companies, the second quarter is likely to be atrocious.

02:30

Shanghai doubles down on quarantine measures in Covid-19 fight

Shanghai doubles down on quarantine measures in Covid-19 fight

Some of the decline in demand will last beyond the pandemic. The middle class is experiencing a dramatic loss of income. Personal income tax receipts in March fell by 51.3 per cent. The prolonged income collapse will weigh on demand for non-essentials beyond the end of the zero-Covid policy.

Advertisement