China’s economy wobbles as Covid starts to hit production


August 10, 2021

China’s economy is showing the first signs of strain with the unraveling of border controls that had previously kept their regions clean of Covid-19.

Since late July, two-thirds of China’s 31 provinces and municipalities have rushed to shut malls and factories and curtail travel to staunch the spread of the Delta strain, which was sparked by imported cases from international flights.

Whether the world’s only major economy not decimated by Covid-19 in 2020 and in the first half of 2021 can emerge from its worst viral resurgence in more than a year depends on how quickly authorities can contain the spike in cases before the pathogen creeps into economic powerhouses like Guangdong province, the country’s main export engine.

Manufacturing and summer travel have already come to a halt in Jiangsu and other provinces that are grappling with outbreaks. The National Health Commission (NHC) reported 108 local infections on Monday, a new daily high this year.

One measure of the Covid-caused disruption was the 80% reduction in passenger numbers on the 378-kilometer subway system of Nanjing, capital of Jiangsu province where the nationwide outbreaks first erupted, on August 6, according to the city’s papers.

Economists are trying to take a wider measure of the outbreak’s likely economic impact. Nomura recently revised down its China GDP growth forecast for the third quarter from 6.4% to 5.1% and its outlook for the entire year from 8.9% to 8.2%.

Lu Ting, Nomura’s chief China economist, told an investors’ conference last week that sweeping lockdowns and travel restrictions unseen since the first half of 2020, coupled with worse-than-expected deluges hitting China’s central heartland, may cloud growth prospects for the rest of the year.

Goldman Sachs has also warned that GDP growth, already trending down from the first half’s high of 12.7% year-on-year, may slacken further amid reinstated anti-virus measures that will crimp travel and consumption.

Beijing’s stated goal for 2021, as declared in Premier Li Keqiang’s work report, is to keep annual GDP growth above the prescribed minimum of 6%.

Other observers are reluctant to raise overly pessimistic flags over the Chinese economy.

ING’s chief China economist Iris Pang, for instance, said the current Delta flare-up had so far spared populous, industrial regions such as Guangdong and Zhejiang, where no cases had been reported.

Pang said the Chinese economy, especially manufacturing and exports in coastal regions, so far remained largely immune to the outbreaks, even though cases continued to mount elsewhere.

Guangdong, the southern province bordering Hong Kong and Macau, is China’s largest provincial economy and exporter and home to the nation’s top-flight corporations, including Huawei, Tencent, ZTE, China Southern Airlines and Guangzhou Automobile.

Official papers there claim the province’s GDP in 2020, estimated at 11 trillion yuan (US$1.7 trillion), surpassed that of South Korea and could be ranked among the world’s top 10. The province of 126 million residents has not yet reported any cases, according to the nationwide tracker updated by the NHC.

Zhejiang, also one of China’s largest provincial economies, is also maintaining its year-long streak of no local cases.

In a report in Chinese, Reuters also cited an analyst with an official think tank as saying that he had thought of assessing the economic impact when clusters cropped up in Guangdong’s Guangzhou and Shenzhen in May.

However, the flare-up, not related to the current one, was swiftly brought under control and doused in both cities in about a month, even before the expert could finish his report.

NHC director Ma Xiaohui said during interviews with state media last week that he expected the outbreaks across the country would start to wane by early September, as lockdowns and mass testing in key hotspots start to bring the virus under control.

But some major foreign-invested manufacturers who long ago shifted production from Guangdong and Zhejiang to inland provinces to tap cheaper labor are facing prolonged disruptions.

Foxconn, Apple’s OEM partner that relies on its sprawling plant in Zhengzhou for more than half of its global iPhone shipments, is reportedly scaling back output for the second time in a month. The Taiwanese firm is yet to fully restore production to the level before the city’s devastating rainstorm and waterlogging in July.

The latest cut in production is due to reinstated lockdowns, travel bans and health and goods inspection rules in Zhengzhou. Still reeling from its disastrous flooding, the city is also flashing red on the NHC’s case map as a major outbreak center, with more than 100 cases reported this month.

Foxconn said none of its 300,000 workers in Zhengzhou have been infected with Covid but admitted that production had been affected as some staff could not return to work due to lockdowns.

China Business News reported that some of Foxconn’s suppliers across China were unable to ship enough components and dispatch technicians to the central city in what is usually a bumper period of production in the run-up to Apple’s much-anticipated new product launch, expected in September.

The OEM giant’s hiring spree to meet Apple’s mounting orders has also been postponed as migrant workers from elsewhere snub job offers to avoid quarantine requirements.

Apple is yet to announce the date of its new iPhone launch but Foxconn has already discussed challenges from anti-virus measures with Zhengzhou’s mayor Hou Hong. Foxconn alone contributed about 80% of the city’s imports and exports of 412.9 billion yuan in 2020.

Other companies known as pillars of central China’s economy, including Nissan and Coca-Cola, are also halting or rejigging production as assembly lines fall quiet and new hirings are put on hold, according to local papers.