U.S. Markets closed
  • S&P 500

    +34.93 (+0.89%)
  • Dow 30

    +382.60 (+1.20%)
  • Nasdaq

    +45.02 (+0.39%)
  • Russell 2000

    +19.10 (+1.11%)
  • Crude Oil

    -0.09 (-0.13%)
  • Gold

    -0.20 (-0.01%)
  • Silver

    +0.00 (+0.02%)

    +0.0053 (+0.4933%)
  • 10-Yr Bond

    +0.0860 (+2.53%)
  • Vix

    -1.36 (-5.33%)

    +0.0102 (+0.8360%)

    -0.4730 (-0.3589%)

    -421.70 (-1.49%)
  • CMC Crypto 200

    +7.30 (+1.22%)
  • FTSE 100

    +68.45 (+0.93%)
  • Nikkei 225

    -388.12 (-1.42%)

Shanghai’s COVID lockdown ‘is impacting China’s economy in a number of different ways’: Analyst

Eurasia Group Practice Head of China and Northeast Asia Michael Hirson explains how Shanghai's strict COVID lockdown is impacting the country's economy and how it's affecting the global supply chain.

Video Transcript

RACHELLE AKUFFO: Welcome back, everyone. We're taking a look at the impact of China's COVID policy as companies weigh the impact on supply chains, inflation, and global growth. For more on this, Dave and I are joined by Michael Hirson, Eurasia Group practice head for China and northeast Asia. Thank you so much for joining us. So Michael, as we take a look now at these expanded lockdowns in Beijing, how costly would you say China's COVID zero tolerance policy has been for China's economy?

MICHAEL HIRSON: It's been very costly. I think there's different estimates in terms of what it's meant for the first quarter. But in some ways, we're not really seeing the full cost incorporated yet in terms of the data coming out of China. Because Shanghai's lockdown is by far the most costly that we've seen since the early stages of the pandemic. And that's only about three to four weeks old.

So bottom line, this is impacting China's economy in a number of different ways. It's also impacting global supply chains. But we haven't really seen the data fully-- we haven't seen the impact fully show up yet in the data.

DAVE BRIGGS: Michael, you said that Beijing's zero COVID policies and Omicron was Eurasia Group's number one risk coming into the year. Why did you know that then? How unprepared is China for this moment?

MICHAEL HIRSON: I mean, say that with no amount of glee. Obviously, it's a very tough situation in China. Our view at the time was this was when Omicron-- as we were putting our top risks report together, this was late December, early January. And it was right when Omicron was ripping through the US and Europe. And our view was given the higher transmissibility of Omicron and China's underperforming vaccines and this zero tolerance policy, this was just a collision course.

In other words, our fear was that Beijing was going to try to use the same tactics against Omicron as it had in the previous stage of the pandemic. And we did not think this was possible without a lot of economic and social disruption. And that's where we are right now. I think that's unfortunately going to be the case until China can really pivot away from zero COVID and have a bit of a higher tolerance for cases. Unfortunately, that's not likely to happen for at least another six months, maybe not until well into 2023.

RACHELLE AKUFFO: So then until that point then, what sort of tools does China's government have at its disposal to really help the economy as it does try and battle these lockdowns?

MICHAEL HIRSON: Well, they are rolling out more stimulus measures. There will be more fiscal and financial support for the firms that are deeply impacted. That is in particular the service sector and smaller firms in China trying to roll out more on consumption. But to be honest, these are important. But they're only going to have a limited effect in terms of offsetting the impact. There's only so much you can do to support a restaurant that's been shuttered or part of the travel industry that's been shuttered.

The other thing they're trying to do is prevent this from snarling global supply chains like it has in Shanghai. They're also-- it's difficult. As long as you're maintaining zero COVID, there's going to be difficulties in terms of logistics because drivers need to get through, workers need to show up to factories. So I think they're trying to learn the lessons of what went wrong with the Shanghai lockdown, which was not handled well. So hopefully, there will be a learning process there. But fundamentally, I think we're still in for a fairly rocky period ahead just given the fundamental challenge of what they're trying to do.

DAVE BRIGGS: Michael, how much can we believe anything that's coming out of China?

MICHAEL HIRSON: It's a good question. I think in terms of COVID cases, I personally don't see any reason to be suspicious. I think the incentives now for China's government from the central level to the local level is to get a handle on outbreaks before they get out of control. So I think local officials are under a lot of pressure to reveal cases. So I wouldn't be too skeptical of that. Deaths is another story.

China has a different way of accounting for deaths from COVID. There may also be incentives for local officials not to reveal as much. So I think that's a politically sensitive number. Then on the GDP side, in terms of the economy, there are some problems adjusting from official data to probably what is a better more accurate measure of underlying growth. That has always been an issue. I don't know that it's necessarily grossly off. But I do think it makes sense to think with-- take the official numbers with a grain of salt in terms of what actual growth is.

RACHELLE AKUFFO: And when you look at China as the world's second largest economy, you also have obviously its key trade relationship with the US. They're still trying to sort of untangle this phase one trade deal. But we are seeing perhaps some movement towards lifting some of those tariffs as a way to sort of help combat inflation in the US. How do you see the US-China relationship progressing in light of what we're seeing here?

MICHAEL HIRSON: I think if you're looking at this from an economic standpoint, there would be little argument that it would benefit both sides to lift tariffs. Comments from Treasury Secretary Yellen, from Duleep Singh at the White House, do show at least one wing of the Biden administration making this case. I think the politics of it are going to be quite difficult, though. To remove tariffs heading into midterm elections risks having the administration look weak on China.

China hasn't been meeting their commitments on the phase one deal, which makes it seem as though perhaps they're being rewarded for something they didn't follow through on. And then you've got Ukraine where I think China is trying to draw this awkward balance where they're not supporting Russia's invasion directly but are still standing behind Russia as a friend and ally. And that also makes the politics of this difficult. So I think personally, I think it's unlikely that we're going to see a major change in tariff policy this year.

DAVE BRIGGS: Michael, quickly, I never ask a one word question. Is China more or less likely to try and invade Taiwan after what they've seen with Russia in Ukraine?

MICHAEL HIRSON: Very tough. I would say about the same, to be honest. Maybe-- I'd say about the same, which is not very likely anytime soon. But the risks do go up over time. I mean, we don't think it's a high probability for the next several years, unfortunately. You look five years out, 10 years out, and those risks do go up pretty significantly.

DAVE BRIGGS: Major story that would be. Thank you, Michael Hirson from the Eurasia Group. Appreciate you coming on. Thank you.