China’s quarantine unrest is changing the global economic outlook | Bot To News

Growing protests against severe pandemic restrictions in China, the world’s second-largest economy, are injecting a new element of uncertainty and instability into the global economy as countries already struggle to manage the fallout from the war in Ukraine, the energy crisis and painful inflation.

For years, China has served as the world’s factory and an important engine of global growth, and turmoil there can’t help but ripple elsewhere. Analysts warn that additional unrest could further slow the production and distribution of integrated circuits, hardware parts, home appliances and more. It may also encourage companies in the United States and Europe to move away from China and diversify their supply chains more quickly.

Millions of Chinese citizens have been reeling under a strict lockdown for months as the Communist Party struggles to contain the spread of the Covid-19 virus, three years after it first emerged. Anger turned into a mass protest after 10 people died in an apartment fire last week, with comments on social media questioning whether the jail had prevented them from escaping.

It is unclear whether the demonstrations that have flared up across the country will be quickly quelled or erupt into a wider resistance against the iron rule of its supreme leader, Xi Jinping, but so far the biggest economic damage has come from the lockdown.

“The biggest economic hit is coming from non-Covid policies,” said Carl Weinberg, chief economist at High Frequency Economics, a research firm. “I don’t see the protests alone changing the game.”

“The world will still turn to China for what it makes best and cheapest,” he added.

Asked how the Biden administration assessed the economic impact of the latest unrest, John Kirby, the National Security Council’s strategic communications coordinator, said Monday, “We don’t see any particular impact on the supply chain right now.”

Still, concerns about the economic impact of the spreading unrest in China appear to be partly responsible for the fall in global markets. The S&P 500 closed 1.5 percent lower, while the dollar, often a safe haven in turbulent times, inched higher. Oil prices started the day with a sharp drop before rallying again.

The sheer size of its economy and resources make China a key player in world trade. “This is extremely central to the global economy,” said Kerry Brown, an associate fellow in the Asia-Pacific program at Chatham House, an international affairs institute in London. That uncertainty “will have a big impact on the rest of the world.”

China now surpasses all countries as the largest importer of oil. In 2021, it produced almost 30 percent of the world’s goods. “There is simply no other option for what China offers in terms of scale and capacity,” Mr Brown said.

Pandemic-related delays and shortages have prompted many industries to reassess the resilience of their supply chains and consider additional sources of raw materials and workers. Apple, which recently announced that it expects sales to decline due to bottlenecks in its Chinese factories, is one of several technology companies that have moved a small part of their production to other countries such as Vietnam or India.

The move by some companies away from China predated the pandemic and dates back to former President Donald J. Trump’s determination to launch a trade war with China, a move that has sparked a spiral of punitive tariffs.

But even if business and political leaders want to be less dependent on China, Mr. Brown said, “the stark reality is that it’s not going to happen anytime soon, if at all.”

“We must not delude ourselves that we can divorce quickly,” he added.

China’s size is a lure for American, European and other companies that not only want to make products quickly and cheaply, but also sell them in large quantities. There is simply no other market as big.

Tesla, John Deere and Volkswagen are among the companies betting on China for future growth, but they are likely to suffer some setbacks, at least in the short term. Volkswagen announced last week that its sales in China had stagnated this year and were 14 percent below expectations.

The protests highlight the political risks associated with investing in China, but analysts say the recent wave reveals nothing investors don’t already know.

“Many investors will be looking ahead and positioning their portfolios now for the reopening,” said Nigel Green, chief executive of deVere Group, a financial advisory firm. They will try to take advantage of the country’s transition from an export economy to a consumer economy, he added.

Luxury brands continue to bet their future on growth in China.

Although the global economy is interconnected, one way China’s slowdown is helping other nations is by lowering the price of energy. Over the past 20 years, the growth of the Chinese economy has been the main driver of global demand for oil and hydrocarbons in general.

Energy experts say the rising number of covid infections and growing doubts that China will ease restrictions in major cities are the main reason oil prices have fallen in the past three weeks to levels last seen before Russia’s invasion of Ukraine ended in February.

“Chinese demand is the largest single driver of global oil demand,” said David Goldwyn, a senior energy diplomat in the Obama administration. “China is a swing demander.”

As China’s economy softened under the grip of a Covid-19 shutdown, fewer oil tankers have arrived at Chinese ports in recent weeks, forcing major Middle Eastern and Russian oil producers to cut their prices. Now, the widening protests are creating yet another uncertainty about future demand.

China’s oil demand is expected to average 15.1 million barrels per day this quarter, down from 15.8 million a year ago, according to analyst firm Kpler.

As for supply chain disruptions, Neil Shearing, chief economist at research firm Capital Economics, said he thought China had been blamed too much. “Everything was framed around a lack of supply,” he said, but in China, industrial production has increased during the pandemic. The problem was that global demand increased even more.

For now, the biggest economic impact will be within China rather than the global economy. Sectors that depend on direct contact – retail, catering, entertainment – will be the most affected. In the past three days, the movement of people has dropped dramatically, Mr Shearing said.

He added that more people are now in quarantine than at the height of the omicron epidemic last winter. The wave of infections and the government’s response to it — not the protests — are what have “the biggest impact on China’s economy,” he said.

Clifford Krauss contributed reporting from Houston and Michael D. Shear from Washington.

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