China’s Covid dilemma is derailing the global recovery

China just can’t shake Covid. Nor can it shake its obsession with trying to stamp out the virus completely. Taken together, it spells trouble for the Chinese economy – and the world.

In recent days, Beijing has been heading the same way as Shanghai, which has endured a gruelling month-long lockdown, vocally opposed by many of its 25m residents. Weddings and funerals have been halted in the capital and schools have closed. It’s thought that 87 cities in China have been subject to some form of lockdown since the pandemic began.

The problem China’s leaders face is that the threat from the virus is real. The country is hamstrung by a second-rate vaccine and patchy uptake, particularly among the elderly. Only 50% of over-80s have received two doses.

Bizarrely, the authorities are sticking to their tactic of trying to gently persuade refuseniks to get jabbed, even as thousands of Chinese citizens are imprisoned in pop-up quarantine blocks.

These unpredictable, heavy-handed measures are weighing on growth. The IMF slashed China’s growth forecast to 4.4% last month, way below Beijing’s aim of 5.5% which economists believe is now highly unlikely. Chinese GDP contracted by 3% in the weeks following Chinese New Year.

Mary Lovely, head of the China programme at the Peterson Institute for International Economics in Washington, warns that China is at risk of a “growth recession”, where slow growth is coupled with rising unemployment. The unemployment rate in 31 major Chinese cities reached 6% in March, a record high.

Consumption and net exports power China’s growth. “When we look at those two drivers going forward, we see some serious danger signs,” Lovely says. “I think the bottom line is that the growth forecast in China will have to be downgraded again.”

Reduced consumer demand in China and shipping congestion at Chinese ports is threatening to derail the global economic recovery, already buffeted by inflation and the war in Ukraine.  

As Doug McWilliams writes for Reaction, below, latest figures show the US could be heading for recession, after shrinking by a worse-than-expected 1.4% in the first quarter of 2022.

China accounts for 12% of global trade, and lockdowns are throwing spanners in the works of the intricate web of international deliveries.

Ocean shipment volumes in Guangdong province collapsed by a third last month after its main city, Schenzhen, went into lockdown.

Officials have closed major motorways across the country to prevent the virus spreading, and lorry drivers who have recently entered Shanghai are being denied entry to other cities, leaving supply chains in disarray. Air freight is also being affected, with deliveries into Shanghai Pudong International Airport backed up.

Shanghai is home to the world’s busiest container port and experts are warning that the effects of the Shanghai lockdown could last years, as the ripples from the supply disruption play out.

It’s a precarious moment for the world economy. And without a change in Covid policy, stagnation in the coming months that extends beyond China’s shores seems the most likely bet.