So far so good. Hereon, does not look as good. The Chinese economy managed to stay afloat despite the devastating impact of the first and second wave on major economies around the world. However, the widespread Omicron seems to have taken the wind out of the dragon’s sails. Quite literally.
Around 28.5 per cent of the world’s manufacturing occurs in China which has largely been spared of the pandemic disruptions except for February 2020 and the activity expanded every month since then till September and October 2021. Fears about supply chains were so intense in October that the term overtook “interest rates” in U.S. Google searches.
Citizens in lockdown purchased Nintendo Switch consoles, baking supplies, disposable masks and more. Such was the demand for goods purchased online that “supply chain” overtook “interest rates” as the most Googled term in the third quarter of the current fiscal.
However, this might be end of steady production and regular supply chains as seven-day Covid case numbers have been above 1,000 since Dec 27 in China. This may seem small relative to any other country, but it represents the highest load in China since the middle of March 2020. Outbreaks have emerged in many cities and across provinces.
For most of the last two years, China’s Covid strategy was straightforward — complete lockdowns and closures. But with new variants, especially the faster-spreading Omicron, that tack hasn’t worked well. Some cities like Shanghai have been successful. Others haven’t been, like Xi’an in Shaanxi province that imposed one of the strictest lockdowns since Wuhan. Authorities are taking a local approach to manage the changing nature of the virus.
China has always planned for short-term disruptions. With a less clear Covid containment strategy now, it will be harder to tell the impact on factories and migrant workers. Covid-19 is dispersed across regions, prioritizing supply chains and keeping production lines running is going to be tough.
Earlier this week, one of the world’s largest automakers, Toyota Motor Corp., had to stop production in Tianjin as the Chinese government tested local citizens. Volkswagen AG faced similar disruptions. On Wednesday, the northern city’s authorities ordered a half-day break for testing.
Already producer prices, while lower than the estimated rise of 11 per cent, came in at over 10 per cent this week. For now, the manufacturers have been able to pass on the price to consumers across the world.
To keep up with surging demand elsewhere in the world, firms’ capital spending has risen over the last few months. However, the profits and credit have slowed down. Manufacturers will not be able to handle any sign of margin erosion, especially amid slowing or uncertain economic growth.
Though China has now administered enough Covid vaccines to double-dose its entire 1.4 billion population, there are still contradictory reports about the effectiveness of the Sinovac and Sinopharm shots against Omicron.
Even an outbreak less severe than other countries have seen with the Delta variant could put a severe strain on hospital capacity, given the speed of Omicron’s spread in China’s highly urbanized population.
The country has just 2.7 nurses per 1,000 people, similar levels to India on 2.4 and well below figures of 11.5 in rich countries. With the Winter Olympics just a month away, the temptation to crack down hard to snuff out the infection will be profound. But losing focus, or even taking the heft of the Chinese supply chain for granted, could be Beijing’s biggest mistake yet.
