China’s strict pandemic policies are causing its industrial production to slow and its economy to take a beating as millions of its citizens are forced under lockdown orders.
New cases of COVID-19 began spiking to their highest levels in parts of mainland China last month, resulting in the government closing off entire metropolises like Shenzhen, which has been called the Silicon Valley of China.
Shanghai, an urban hub with a population nearly equivalent to that of Australia, has been on lockdown for five weeks now. Instead of easing China’s “zero COVID” approach to the pandemic, the government said this week it would step up its efforts to isolate cases and prevent the further spread of the virus.
“At present, the epidemic situation is still very serious, and the prevention and control work is at a critical moment,” the government said in a statement.
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The CSI 300 Index has languished during the lockdowns, shedding more than 6% of its total value over the past month alone and nearly 20% over the last six months.
Additionally, fearing that the lockdowns will continue, investors from other countries have begun pulling their money out of the Chinese economy. In March, some $7 billion worth of shares were yanked from China’s markets by overseas investors, and April has seen outflows of about $1 billion so far, according to Bloomberg.
Retail sales across mainland China fell 2% in March and 3.5% from a year ago, the worst annual drop since the height of the pandemic in 2020. The Chinese unemployment rate has also ticked upward in light of the economic slowdown, rising to 5.8% — the worst since 2020 and above Beijing’s target.
“Beijing now appears to prioritize controlling the pandemic above all,” said Tommy Wu, lead China economist at Oxford Economics. “That means local governments will likely focus on limiting infections and put aside concerns about the economy for now.”
Last month, several factories were affected by the shutdowns, including Foxconn, a major assembler of iPhones. The lockdowns in China could further worsen U.S. inflation by adding to supply constraints.
“What’s occurring is that it’s already affecting supplies,” Desmond Lachman, a senior fellow at the American Enterprise Institute, told the Washington Examiner as the lockdowns intensified last month.
U.S. inflation has been rising rapidly. Consumer prices increased by 8.5% for the 12 months ending in March, the fastest pace since 1981. The Federal Reserve hiked its interest rate target for the first time in years last month in an effort to rein in inflation.
If the lockdown situation continues or intensifies in China, some contend the Fed might have to act even more aggressively to tamp down higher prices — a prospect that brings the likelihood of a recession further into focus.
Minneapolis Fed President Neel Kashkari warned this week that if the Chinese lockdowns put too much further strain on global supply chains, the Fed might need to use its monetary policy more hawkishly to stave off rising prices.
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On Thursday, Fed Chairman Jerome Powell acknowledged that it will be a difficult task to bring down inflation without plunging the U.S. economy into a recession.
“Our goal is to use our tools to get demand and supply back in sync so that inflation moves down and does so without a slowdown that amounts to a recession,” Powell said during a panel. “I don’t think you’ll hear anyone at the Fed say that that’s going to be straightforward or easy. It’s going to be very challenging. We’re going to do our best to accomplish that.”
