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China Zero-COVID policy to have prolonged impact on global supply chain: GlobalData

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The strict restrictions instated by the Chinese authorize following the continued outbreak of new variants of COVID-19 have resulted in the shutdown of major manufacturing units and ports. GlobalData, a leading data, and analytics company say that the Chinese government’s aggressive zero-COVID policy will have a prolonged impact on the global supply chains. 

The supply shortage has led to a higher input cost resulting in the end-products being sold at inflated prices. A vicious cycle of low production, low supply, higher prices with a hike in the policy rate to tame supply-driven inflation might overshadow the economic growth prospects for China. 

GlobalData has revised China’s real GDP growth taking into consideration the present situation and forecasted a 5% GDP growth in March 2022 as against the earlier forecast of 5.5% in December 2021. 

As China is a global leader in terms of manufacturing and exports of raw materials, major economies are expected to face ripple effects of the strict restrictions. For the US, which has a huge trade deficit with China, supply crunches will add to delays in productions and further raise the price of end-products. Inflationary pressures driven by subdued supply and excess demand will retard the growth prospects for US manufacturers.”

~ Gargi Rao, Economic Research Analyst at GlobalData

Hong Kong, Singapore, Japan, Vietnam, South Korea, and India in 2020 constituted 29.9% of Chinese exports and remained vulnerable to China’s supply chain woes. 

Japan’s trade deficit soared in January 2022 due to higher imported commodity costs amid the surge in energy prices. For Hong Kong companies, port congestion in China is slowing the delivery of raw materials forcing them to rely more on stockpiled inventories of goods.

Global manufacturing production growth remained subdued across consumer, intermediate, and investment goods industries. Moreover, global semiconductor and electrical steel shortages will continue into 2022, forcing automakers to limit production. Against this backdrop of labour shortages, port congestion, supply crunch, GlobalData forecasts the global inflation rate to reach 5.7% in 2022, compared to 3.5% in 2021.

GlobalData also forecasts the inflation rate to rise in major export destinations of China. Inflation rates projections for the UK have been revised upward by 0.8 (percentage points) to 5.9% in March 2022. Similarly, projections for India (by 0.4pp to 5.5%), the US (by 0.4pp to 4.9%), and Germany (by 1.1pp to 4.2%) have also been revised upward. 

Rao concludes, “Despite zero-Covid policy measures being highly localized and targeted, manufacturing giants have shut down along with the closure of major shipping ports which affected trading activities. On the other hand, with tight credit conditions, structural reforms and regulatory tightening in various sectors, demand for Chinese goods in the global market is slowing down.”

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