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China’s lockdowns have ‘a huge impact on economic growth,’ analyst says

Dane Chamorro, Control Risks head of Global Risk Analysis and Business Intelligence practice in the Americas, joins Yahoo Finance Live to discuss China's COVID lockdowns, the impact to supply chains and global economic growth, and the outlook for the restrictions.

Video Transcript

- Well, for more on the implications of these protests across China, let's bring in Dane Chamorro Control Risks head of Global Risk Analysis. Good to have you on Dane. So obviously a lot at stake here for President Xi holding on to this zero-COVID policy. Obviously, this is rare to see multiple protests at the same time on the same issue. What exactly is at stake right now for China's economy?

DANE CHAMORRO: Well, as you know, China's been locked down, or a lot of large parts of China have been locked down for quite a few months now. You've seen this frustration boil over in the demonstrations that we're seeing in major cities in China. And that's really about the ability of people to go about their daily lives, to go to hospitals when they need to, quite apart from COVID, to run their businesses, to buy and sell, et cetera.

And so this is the frustration that's boiled over. And your pro- earlier was saying, alluding to what effect this might have on energy prices and other things, should the lockdown be eased. And we also don't see the lockdown being eased until China really has an effective vaccine rolled out across a larger proportion of its population. It's really only begun that process. It's probably another 9 to 12 months before they can roll it out to a significant part of the population. So it has a huge impact, of course, on economic growth when large parts of the country continue to exist under various forms of lockdown.

- So Dane, do you think people underestimated China's ability to reopen while still holding on to this zero-COVID policy, and what does this mean in terms of its role as a global growth engine?

DANE CHAMORRO: So it's a great question. I mean, China is absolutely key for global growth, right? It's a huge share, anywhere between kind of 25% to 35% of global growth, economic growth. So if you think about it this way, when the Chinese economy shrinks 1%, the global economy shrinks about a half a percent. But then there are major countries that are major trading partners, suppliers to China, countries like Indonesia or Chile, usually they're supplying raw materials.

When China shrinks 1%, they shrink almost a full percentage point. So it has a huge impact on a wide variety of countries and economies around the world. So it's actually imperative that China get back to growth, to its more normal path of growth. And the new normal is kind of probably somewhere around 4%. It's not going to do that, of course, this current calendar year. And it probably won't do it next year, given how long it will take them to roll out this vaccine. But we do think that once they've done that, once they've got an effective vaccine to enough the population, then you're going to have a big rebound in growth because you've essentially had suppressed growth by then, by that point about two years.

- And Dane you mentioned companies within, China but what about multinational companies with exposure to China? Of course, primarily, Apple looking at perhaps 6 million iPhones produce being disrupted here. What does this mean for them and the message that this sends to companies with exposure there?

DANE CHAMORRO: Well most multinationals that were manufacturing, selling in China or manufacturing for export from China have suffered some form of supply chain disruption over the last two years at some point because ports were shut down, because parts weren't available, because work forces weren't available. It's of course, been the most extreme kind of in the last probably six to nine months. You saw the demonstration that you just mentioned at the facility in Zhengzhou in northern China last week. And of course, that will directly affect that supply chain.

But it's affected a whole variety of industries domestically and for export. So it just means less predictability. And so what we see, of course, is a lot of multinationals, a lot of our clients looking at other jurisdictions. Not to leave China by any stretch of the imagination, but simply to add on the margin to other jurisdictions so they have more resilience in the supply chain. And sometimes that's Mexico and sometimes it's Poland and sometimes it's Thailand or Vietnam, but it's not really leaving China. It's simply adding resilience by adding facilities and more capability to manufacture in other countries.

- And are there other aspects of China's economy and financial system that are really being exacerbated by zero-COVID that could have more spillover effects?

DANE CHAMORRO: Sure, so we've seen it in the construction and the housing industry, which was, of course, it's kind of a systematic problem. And China tends to cycle through challenges with that industry every few years. It's, of course, exacerbated some of the problems in other parts of the economy. Retail, of course, takes a severe hit, and about half of the Chinese economy is retail or consumption, if you will. And of course, when people can't move, when consumer confidence is at an all time low in China, which it is now because of these lockdowns, that takes a big hit, and that's a big chunk of the economy. So, it has very much exacerbated some of these downward trends that we've seen in the economic sphere in China.

- We'll have to see how this develops. We're continuing to keep an eye on it. A big thank you Control Risks. Head of Global Risk Analysis Dane Chamorro. Thank you for joining us this morning.