U.S. Markets closed

China's zero-COVID policy takes toll on global economy

Yahoo Finance anchors discuss COVID lockdown fears resurfacing in China and what it means for China's GDP and global supply chains.

Video Transcript

AKIKO FUJITA: Well, spikes of COVID-19 cases in Shanghai and Tianjin causing large cities in China to brace for another round of mass lockdowns. The country still pushing forward with its zero-COVID policy ahead of a party meeting later this year to confirm President Xi Jinping's leadership of China. That would be the third term, all but decided.

But remember, Brian, just on Friday, we were talking about the contraction that we saw for China's GDP quarter on quarter. Obviously, that was at the height of the Shanghai lockdown. But I mean, this is the issue that keeps coming up, which is every time you think that things are picking back up again--

BRIAN CHEUNG: Maybe they shut down again.

AKIKO FUJITA: --the zero-COVID policy means they've got to shut down with just a few cases around.

BRIAN CHEUNG: Yeah, and I think that the commentary around the last shutdown, because it was just so devastating to economic activity and even socially as well, with a lot of the younger generation of Chinese being stuck inside their apartments for a long period of time, people were saying, well, maybe the Politburo and Xi Jinping will realize that maybe they can loosen up on the zero-COVID policy.

And I think what we've realized since then is that there's really no signs of any relenting from the government on abating on that policy, right? And again, that is relevant to the economic story because, globally, they are such an engine--

AKIKO FUJITA: So much demand comes out of China.

BRIAN CHEUNG: Oil. The whole oil story is very much tied to what's going on in China. So beyond just looking at what's going on in the Shanghai Composite and what's happening to Didi Chuxing or Alibaba is just the overall demand story with that economy being such a substantial part of the story.

AKIKO FUJITA: Well, and that's just the energy picture, right? And we also talk about the ports. They have the largest ports in the world. Right now, we're not talking about a shutdown. We're not talking about a repeat of 2020. But if things get worse, is there a partial shutdown? Is there some kind of delay? I mean, all of that trickles through the rest of the global economy. And the demand is so significant coming out of China. At the end of the day, you got to keep watching this story.

BRIAN CHEUNG: Yeah, and I think that this comes at a time where you have the administration trying to push this narrative of friend shoring, right? You had Janet Yellen going to South Korea, telling the South Koreans in remarks this morning that, hey, we should try to work more closely together because then we won't be exposed to the supply chain snags that we see in China.

Not making a direct dig at their zero-COVID policy, but this is going to be something that a lot of large multinational corporates are going to look at and say, I should maybe switch my supply chain around because I don't want to be exposed, not just to the political challenges. We know that there have been a lot of human rights concerns with factories that are in China, but just even from a disruption standpoint. We know that through this pandemic, it's just really been a challenge for companies that have been based there.

AKIKO FUJITA: Well, and you could argue they had already been planning for that because of the trade war with China. This will only accelerate that. At the end of the day, it is about diversification. You just can't have your eggs in one basket, whether that's China or Russia or any country, because of all the risks that we've come to realize over the last several months.