Markets are getting a double whammy on China Covid dynamics:
- The realization that hopes for near-term pivot on zero-Covid were unrealistic
- New Covid cases hitting their highest point since April, centered in a key economic hub (Guangdong)
The overall number of cases remains small by international standards, but the location is troubling: the largest outbreak (about half of cases) is in Guangdong Province. Guangdong is #1 by size of economy (about 10% of national GDP) and of course a key export hub. Guangzhou, the capital city, is now in partial lockdown.
There is probably still some over-optimism that this new round of outbreaks will force China’s government to try a more flexible approach to containment. I think that is very unlikely: the leadership’s lesson from Shanghai was that they waited too long to lock down. So I expect the response in Guangzhou to be vigorous in the hopes of getting it back under control quickly.
Beyond the potential hit to the domestic economy, there could be disruptions to global supply chains if multiple cities/production sites in Guangdong are forced to lock down. That is important to monitor but at this point I don’t expect anything on the scale of Shanghai’s lockdown this spring. Chinese local authorities have gotten better at minimizing disruptions to production, including through “closed loop” operations where workers don’t leave the production site.
For our latest report on China’s Covid policies, please see:
