China’s Covid lockdowns hit harder than Shanghai and Beijing
Nationwide, about 327.9 million people in more than 40 cities are affected by the latest lockdowns, Nomura’s chief China economist Ting Lu estimated Wednesday. Pictured in February, a shopping mall closed in Suzhou with red banners proclaiming the need to fight the virus.
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BEIJING — While the bulk of China’s new Covid cases are in Shanghai and Beijing, data shows the impact of trade restrictions is more widespread.
On the one hand, nearly 60% of European businesses in the country said they were reducing their revenue projections for 2022 as a result of Covid checks, according to a survey carried out late last month by the Chamber of Commerce of the EU in China. More than half of those cuts were 6% to 15%, the chamber said Thursday.
Among Chinese businesses, monthly surveys released last week showed that manufacturing and services business sentiment fell in April to the lowest since the initial shock of the pandemic in February 2020. The official and third-party versions of the survey , known as purchasing managers’, indicated a further contraction in business activity from March.
Caixin’s Services PMI released on Thursday was the latest release, dropping to 36.2 in April. It is well below the 50 line which indicates contraction or expansion.
Expectations for future production have improved slightly, according to a press release. But there were “some concerns about how long it will take to fully contain the virus and return to more normal trading conditions”.
Other data describes an equally broad impact of Covid restrictions in China.
Power generation rose in the first two months of the year but slowed to zero growth in March, according to figures cited by Larry Hu, chief China economist at Macquarie. He expects a decline in power generation in April.
In the massive real estate sector, Hu noted that the closures also make it “physically impossible to buy property,” sending sales in the top 30 cities down 54% in April from a year ago.
On the consumer side, companies like Starbucks are reporting widespread Covid impact.
In the quarter ended April 3, the coffee giant said 72% of the 225 Chinese cities it operates experienced outbreaks of omicron. The company has more than 5,600 stores spread across eastern and central China, its second largest market.
“With this more contagious variant, mobility restrictions and lockdowns are being imposed more quickly and eased more cautiously,” Starbucks China President Belinda Wong said in an earnings call. She noted that most stores still able to operate are doing so under “strict security protocols that interfere with our traffic and operations.”
Starbucks said Tuesday that a third of its stores remained temporarily closed or only offered delivery or takeout. The company suspended its guidance for the remainder of its fiscal year.
Since March, mainland China has dealt with its worst Covid outbreak since the start of 2020 – using the same zero Covid strategy of rapid lockdowns that helped the country quickly resume growth at the time. Manufacturing areas from the northern province of Jilin to the southern city of Shenzhen were among those initially forced to close.
However, the duration of the restrictions varied significantly by region. Shanghai, China’s largest city, remained essentially closed for the entire month of April. The capital, Beijing, began tightening travel and business restrictions towards the end of the month to control a spike in Covid cases.
With China’s two largest cities by GDP under Covid lockdown for the five-day holiday that ended on Wednesday, domestic tourism revenue for the period only recovered to 64.68 billion yuan ( $9.95 billion) – 44% of pre-pandemic levels, according to official figures.
“During the shutdowns, residents only consume daily necessities, so consumption will inevitably drop, not to mention that the price could easily triple during the city-level shutdowns,” said Yue Su, senior economist at The Economist Intelligence. Unit.
“Lack of confidence in the private sector will lead to investment and employment, which will take much longer to recover even if China introduces more stimulus,” she said.
China reported better-than-expected first-quarter GDP growth of 4.8% from a year ago. But retail sales fell in March, while unemployment in the country’s biggest cities hit a new pandemic high so far.
The lockdowns are affecting “consumers’ ability to reach stores, grocery stores, department stores,” U.S. household products giant Procter & Gamble said in an earnings call last month. “Even online purchases are significantly limited due to the inability to deliver.”
The company said the market for its products in China did not increase in value during the first three months of the year, and that “with the continued lockdown and market difficulties, we expect that April is stable to negative”.
Contacted by CNBC on Wednesday, P&G said it had no update to share.
Lockdowns across the country
While Shanghai’s prolonged lockdown experience could help other cities better organize food and medical services, EIU’s Su said local governments with poor finances would struggle to sustain the zero-Covid policy without central government transfers.
This week, among small towns tightening Covid controls, the city of Zhengzhou ordered residents to work from home and schools to go online until the end of Tuesday. Zhengzhou is home to a major factory for iPhone supplier Foxconn, which did not immediately respond to a request for comment.
Factories, as is the case in Zhengzhou, can generally maintain at least limited production if they meet the government’s Covid requirements, such as keeping workers in a bubble around the industrial plant.
Yum China, which operates KFC and Pizza Hut in the country, warned this week of “stronger headwinds” in the second quarter that would likely result in an operating loss for the period. Besides Shanghai, major cities such as Fuzhou, Suzhou, Tianjin, Shenzhen and Xi’an were partially shut down in April, the company said.
Hope for a turning point to come
Nationwide, about 327.9 million people in more than 40 cities are affected by the latest lockdowns, Nomura’s chief economist for China, Ting Lu, estimated on Wednesday.
That’s about 31% of China’s GDP, down slightly from last week’s 35.1% share, he said.
The number of new Covid cases in Shanghai and across the country has plummeted in recent days, as Shanghai authorities have added more companies to a whitelist to resume production. A measure of road freight – reflecting the ease with which goods and parts can move across the country – has also improved, although it is still well below normal levels.
“The worst is probably behind us,” Macquarie’s Hu said in a note Wednesday. “May should see the economy recover. Politburo meeting [of top Chinese leaders] last Friday suggests it’s too early for top executives to give up the 5% of GDP net profit.”
Mainland China stocks, known as A-shares, rose slightly on Thursday, their first day of trading since Friday due to the holiday.
“In our view, the implementation and execution of the policy easing will have a greater impact on the stock market,” UBS Securities strategist Lei Meng said in a note Thursday.
After a 4% year-on-year increase in A-share earnings in the first quarter, the company expects travel restrictions and other disruptions to drive earnings down in the second quarter – the expected low point for the year .