China is approaching "peak lockdown" where a small number of Covid cases have caused a large portion of the population to experience restrictions on movement. And that in turn is causing economists to cut their expectations for growth in China this year.
There are 49 Chinese cities in some form of lockdown, according to tracking by Nomura. Together they account for 20.7% of China's population, or 291.7 million people, almost double the rate last week. Taking in big cities such as Chengdu, Shenzhen, Guangzhou, Tianjin and Shanghai, they account for 24.5% of China's economy.
"What is becoming increasingly concerning is that Covid hotspots are continuing to shift away from several remote regions and cities - with seemingly less economic significance to the country - to provinces that matter much more to China's national economy," Nomura Chief China Economist Ting Lu and his team write in a note to clients.
Guangdong Province, for instance, has the highest population in China, and accounts for the largest share of the economy out of the 31 provinces nationwide. The restrictions in Shenzhen and Guangzhou could intensify, and are already expanding to other cities in the province such as Huizhou and Zhaoqing.
China's lockdowns prompted Jefferies Global Head of Equity Strategy Christopher Wood at the start of the week to shave two percentage points off his allocation to China in his model Asian portfolio, reallocating the resources to Indian stocks.
And the shutdowns coupled with weak global demand are feeding through in today's economic numbers. China's exports rose 7.1% in August, a slowdown from an 18.0% pace of growth in July, and the first deceleration since April. Economics polled by Reuters had been expecting a 12.8% export increase for August.
Chengdu in central China is currently the worst-affected Chinese city, with a population of 21 million in the metro area confined to home. One person per household is allowed out to shop for groceries once per day.
But China's equivalent of Silicon Valley, Shenzhen, is sorely hampering the movement of its citizens, with the government forcing the cancellation of all large-scale events and indoor entertainment. Residents who want to leave the city must show two negative Covid tests conducted within the last two days. Some districts of Shenzhen have tighter customized lockdowns.
We're still talking a very low rate of infection for a country the size of China. There were 1,695 new cases reported China-wide yesterday, across 1.4 billion people. Here in Hong Kong, with 7.3 million people, we chalked up 9,373 cases yesterday, which was actually down from a run rate above 10,000 every other day so far this month.
Hong Kong has introduced a China-style health code system on your smartphone, so you can't enter public venues if you're identified as a close contact of an infected person. But otherwise life continues as normal - although I have no idea when we'll be able to stop wearing masks in public places.
In China, the response is far out of perspective given the current size of the infection problem. There are two issues. Chinese President Xi Jinping has made "conquering" Covid a central part of his platform, and has bragged about how China's success sets it apart. And secondly, the Chinese vaccines are not all that effective, with overseas tests demonstrating at best 50% efficacy, and that was in the early days of the pandemic. They appear to provide little protection against the fast-moving, less-serious Omicron variant.
The 291.7 million people under Covid restrictions is up sharply from 161.3 million people last week. Although the cities they call home account for 24.5% of the Chinese economy, or C¥28.0 trillion (US$4.0 trillion), not all the cities are in full lockdown. Nomura therefore estimates that the lockdowns hit 12.5% of Chinese GDP - still way up from 5.3% last week.
Holdups in those cities will slowly filter through the supply chain, as we have seen as the global Covid recovery plays out. The still-escalating lockdown situation in China promises to disrupt the world's second-largest economy for months to come. For instance, road freight turnover fell 20.1% last week, compared with the same time last year. Subway traffic in 15 major cities fell 14.8%, again compared with last year.
Nomura cut its Q3 forecast for Chinese GDP to 2.6%, from 2.9%, prompting it to revise its full-year 2022 forecast to 2.7% growth. That's half the rate of "around 5.5%" that the Chinese top brass predicted at the annual economic-planning meeting this March.
Although Chinese shares closed flat on Wednesday, with the CSI 300 index up an ever-so-slight 0.07%, they are down 17.5% so far this year. Hong Kong stocks have fared even worse, with less of a domestic market to fall back on. The Hang Seng Index is down 18.2% in 2022.
Export-oriented markets in Asia suffered sorely today. That's after a strong showing for the U.S. service sector reinforced the likelihood of a hawkish turn at the U.S. Federal Reserve's interest-rates meeting later this month.
The broad MSCI Asia ex-Japan index sank to a two-year low, down 1.5%. The chip-focused markets of Taiwan, with the Taiex down 1.8%, and South Korea, where the Kospi fell 1.4%, caused the downward pressure.
In Taipei, Taiwan Semiconductor Manufacturing Co. (TSM) and TW:2330 lurched 3.4% lower, suggesting its U.S. ticker will have ground to give on Wall Street later today. Korean chipmakers Samsung Electronics KR:005930, down 1.9%, and SK Hynix KR:000660, down 1.5%, reflect grimmer prospects for electronics shipments over the rest of this year.
Mining stocks and other major commodities exporters also lured Australian shares lower on Wednesday. The ASX 200 index ended down 1.4%, taking it back to levels seen in mid-July. Investors were also responding to an interest-rate hike from the Reserve Bank of Australia the day before.
