Australian Economy

What could China’s zero Covid strategy mean for Australian business? | Australian economy

After two years of Covid and now Russia’s invasion of Ukraine, the resilience of the global interlinked supply chains is being continually tested.

Now China’s zero Covid strategy is being challenged for the first time since the virus was first detected in the central city of Wuhan, with outbreaks in many cities.

How might the outbreak and subsequent severe lockdowns affect Australia, which relies on China as its biggest trade partner by far?

And could there be a further twist if Beijing’s close ties to Moscow end up snaring China’s economy in the growing web of international sanctions over Russia’s war?

How big is the Covid outbreak?

More than 5,000 new cases were reported by the Chinese government on Tuesday, the most since the early days of the Wuhan outbreak, according to Bloomberg.

The list of regions with tight lockdowns already include the southern technology hubs of Shenzhen and Dongguan, covering 23 million people between them, and the north-eastern province of Jilin, with a similar number of residents.

Add in megacities such as Shanghai and provincial capitals like Xi’an, and large parts of the economy are suddenly in hibernation.

As #China’s officials continue to pursue a “zero-#Covid” strategy aiming for elimination in each outbreak, there’re more than 50 million residents under strict, stay at home, lockdown today. Then add those under softer “quasi-lockdown” measures that’s more like 90 million people.

— Stephen McDonell (@StephenMcDonell) March 15, 2022

What’s the economic impact?

Betty Wang, ANZ’s senior economist in Hong Kong, says the lockdowns will certainly dent the economy.

“A one-week lockdown of the affected areas could cause [a drop of] as much as 0.8 percentage points in GDP growth,” Wang says.

That’s significant given the government’s predicted growth rate of 5.5% for 2022. ANZ is predicting a 5% growth rate is more likely.

But, as in Australia, Beijing is not sitting back. It’s planning a ¥2.5tn (A$500bn) tax cut and rebate plan to stoke growth among other support, Wang says.

Disruptions in Shenzhen, dubbed China’s Silicon Valley, will send wide ripples.

Foxconn, an assembler of iPhones, suspended production, helping to send Apple shares lower on Monday before they rebounded during trading on Tuesday. Toyota and Volkswagen, which have plants in Jilin, were among other firms affected.

Effects, though, should prove temporary – provided the lockdowns aren’t prolonged, Wang said.

Mixed strength

The current state of the Chinese economy going into the Covid lockdown, though, was already mixed.

After the first two months of 2022, the economy performed better than expected in areas such as spending on so-called fixed assets such as roads, with 12.2% growth – more than double the 5% pace economists predicted.

Retail sales grew 6.7%, or twice the 3% rate forecast, while even investment in the debt-wracked property sector rose almost 4% when a fall of 7% was tipped, according to CBA senior Asia economist Kevin Xie.

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“The one weak spot in [Tuesday’s] data was a lift in the surveyed jobless rate to 5.5%, indicating increased stress in the labour market,” Xie said.

“We expect consumption, the weak spot over the past two years, will again be hurt the most compared to production and exports in March,” he said. “Moreover, the continued weakness in the property sector, elevated geopolitical tensions, and tighter regulations in the tech sector continue to weigh on economic growth.”

Those geopolitical tensions include China’s close relations with Russia.

Speculation that the US might retaliate if Beijing goes out of its way to help Moscow, including undermining sanctions, has already hurt Chinese firms listed on US markets and more could follow. It’s “another black swan” that needs watching closely, the ANZ’s Wang says.

As a close ally of the US, Australia would be expected to echo any sanctions imposed on China or Chinese companies for helping Russia, much as it joined the US in banning Russian oil imports. But unlike sanctions against Russia, such a move against China would have a dramatic impact on Australia’s economy.

How does this affect Australia?

In the meantime, there are some positives for Australian exporters.

Every time China’s economy stumbles, the government amps up spending on roads, bridges and other buildings, moves that tend to boost demand for raw materials.

That helps commodity exporters such as Australia, where higher iron ore or other material prices boost corporate profits and bolster budget coffers.

The tax take for Australian governments rises about $2bn for every 10% rise in global coal and gas prices, Chris Richardson, a senior economist at Deloitte, says. He adds that the boost from rising iron ore prices could be even greater, assuming they go up and stay up.

But for Australian businesses, Covid-related lockdowns risk a further deterioration of already critical supply constraints, says Andrew McKellar, chief executive of the Australian Chamber of Commerce and Industry.

The ACCI-Westpac Survey of Industrial Trends, released on Tuesday, showed Australian manufacturers are facing the worst material shortages since the 1974 oil shock. Profits will suffer from any more disruptions if input costs rise more than they can pass on, he said.

“International supply chain bottlenecks are producing material constraints on a scale not seen in almost 50 years,” McKellar says.

“The Chinese lockdowns reaffirm the need to continue diversification of critical supply chains, ensuring that Australian businesses can source key components of production.”

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