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The global business impact of China’s ‘zero Covid’ policy

business-articlesThe global business impact of China’s ‘zero Covid’ policy
After almost two months, Shanghai has announced it will start to ease its lockdown measures from the start of June.

Beijing’s commitment to its ‘zero-Covid’ policy has led to dozens of cities across the country, including the financial hub of Shanghai, to almost completely shut down.

China’s strict lockdown measures have been felt across the world. Manufacturing and supply chains have been severely disrupted and analysts warn this is likely to further stoke global inflationary pressures.

And businesses are already feeling the strain, both directly and indirectly as the consequences of China’s zero-Covid policy ripples through the global economy.

 

Disruption to manufacturing and global supply chains

Despite some businesses having taken steps to diversify their supply chains in the wake of the pandemic, China remains the world’s factory. As such the country’s latest shut down will undoubtedly cause fresh bottlenecks in supply chains amidst the considerable disruption to China’s manufacturing and shipping industries.

Tommy Wu, a lead economist from Oxford Economics, says of the lockdown and its lasting effect on the global economy; ‘China’s COVID restrictions are weighing heavily on its domestic demand, which has already been weak even before the recent Omicron outbreaks and lockdowns. Those same restrictions, [are] also affecting the country’s industrial production and export activity, which will amplify the ongoing global supply disruptions.’

Apple have already warned of huge losses related to the latest Covid outbreak in China which has seen an impact on supply chain issues, potentially costing the company $8 billion this quarter alone.

Car manufacturing has also seen some of the most notable disruption due to China’s Covid lockdowns with entire factories shuttered amid slumping sales and supply chain issues. Volkswagen and Toyota, had to suspend production for several weeks as both component and employee shortages forced factory closures.

On the other hand, some business may have benefited from the slowdown in China’s manufacturing sector. An expected drop in demand for raw materials from China prompted commodity prices, particularly oil, to retreat from their recent highs, reducing costs for some firms.

Meanwhile, Shanghai’s lockdown has also severely disrupted activity at one of China’s busiest ports and contributed to Chinese export growth plunging to a two-year low in April.

For businesses this means that getting hold of goods could become more difficult, with shortages likely to push input costs even higher, even for firms which aren’t importing goods from China.

 

Consumer spending slowdown

China accounts for around 12% of global trade, acting not only the world’s manufacturing hub, but also a major consumer of goods, with the importance of the Chinese market growing in step with the country’s burgeoning middle class.

Ben Cavender, managing director of the consultancy China Market Research Group comments: ‘Like it or not, at this point if you're a multinational, China is probably your first or second largest consumer market.’

China is a key market for many industries, particularly the technology, automobile and luxury goods sectors. Consumer spending has seen a massive drop off in China due to the strict lockdown measures. Although these restrictions are about to be eased, not everyone is confident spending will quickly return to pre-lockdown levels.

Chief Financial Officer Jean-Marc Duplaix of Kering, owner of luxury brands including Gucci and Alexander McQueen, said; ‘The situation is hopefully temporary, (it’s) unprecedented. Frankly speaking, consumers right now are not worried about buying lipstick or coffee, they're really much more focused on getting (necessities).’

In the meantime, some international firms have already felt the impact of China’s latest lockdowns and warn of significant uncertainty going forward.

Starbucks suspended its financial guidance for the next six months as coffee shops across China remain closed. China is the company’s second largest market after the US.

 

Inflationary pressures

Beijing’s strict adherence to its zero-Covid policy and the resulting supply bottlenecks coincided with a surge in global demand as countries lifted most Omicron restrictions.

Unsurprisingly the laws of supply and demand have seen firms forced to pay more in order to secure items. A cost which is then often passed on to consumers at a time when cost of living concerns is making it increasingly difficult for firms to win over price-conscious households.

However, it happens that China’s Omicron outbreak came at a time when global inflationary pressures were already elevated, particularly in the wake of Russia’s invasion of Ukraine.

This in turn is pushing the world’s central banks to rapidly tighten monetary policy, which is likely to prove another headache for businesses as it pushes up borrowing costs.

 

The long road to recovery

While much of China will reopen this month, the prolonged lockdowns are likely to have both immediate and long-lasting consequences for business.

In the short-term Businesses should brace for further price rises as renewed demand from China’s manufacturing sector is likely to trigger a spike in commodity prices.

There are also likely to be long lead times on new orders as factories face a significant backlog of legacy orders, not to mention the lasting impact on global shipping.

Looking further ahead, so long as China maintains its ‘zero-Covid’ policy, the possibility of another Covid spike shutting down its industrial centres remains a real risk.

This makes investing in the country highly uncertain for international businesses but could also provide opportunities for growth for firms willing to take the risks as rivals potentially reduce their presence in the country.

Overall businesses face a highly uncertain future as China’s lockdown feeds into wide global economic concerns and firms will want to take steps to ensure they are able to weather whatever the future holds.
 
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Currencies Direct

Currencies Direct is one of Europe's leading non-bank providers of currency exchange and international payment services. Since we were formed in 1996, we've maintained our focus on providing innovative foreign exchange and international currency transfer services to corporations of all sizes, online sellers and private individuals. We have also expanded our services to provide dynamic and pioneering "business to business" solutions to help companies, tier 2/3 banks and other non-bank financial institutions to process their international payments. Our headquarters are in the City of London (United Kingdom) and we have operations in continental Europe, Africa, Asia, and the United States. Currencies Direct is jointly owned by private equity firms Palamon Capital Partners and Corsair Capital.

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