Analysis: China is risking a big hit to the economy and supply chains with zero-Omicron approach

The Covid-19 variant has been So far, there doesn’t appear to have been a lasting impact on trade. Customs data released Friday showed that exports jumped 21% in December from a year ago, exceeding expectations. The country’s trade surplus was $676 billion in 2021, an all-time high. That indicates that China’s strategy might actually be helping: Export orders may have shifted to China from other developing countries because of the “Omicron damage to the global supply chain,” according to Zhiwei Zhang, chief economist for Pinpoint Asset Management.Even so, there are risks — especially if China imposes a nationwide lockdown.”Although China’s latest virus wave doesn’t appear to have dented exports much in December, media reports point to growing virus-linked congestion and delays at a number of major Chinese ports since the start of the year,” wrote Julian Evans-Pritchard, senior China economist for Capital Economics, in a Friday research note. “With cases popping up in even more port cities in recent days, including Dalian and Shanghai, the situation is likely to worsen in the near-term, pulling down shipments this month.”Staying the course, at a priceChina isn’t likely to let up on its zero-Covid approach for a while. One reason: the country’s Sinovac Covid-19 vaccine Still, the economic cost of containing an aggressive variant could be great. Analysts at Nomura wrote this week that retail sales and other services could take a big hit if there are more lockdowns, adding that the benefits of zero-Covid are “likely diminishing while costs are rising.” They forecast GDP growth of 2.9% for the first quarter, and 4.3% for the entirety of 2022.Eurasia Group president Ian Bremmer and chairman Cliff Kupchan, meanwhile, labeled the failure of China’s zero-Covid policy as the top global geopolitical risk for 2022, suggesting that a breakdown could lead to larger outbreaks, more severe lockdowns and greater economic disruption.”It’s the opposite of where Xi Jinping wants his country to be in the run-up to his third term, but there’s nothing he can do about it,” they wrote in their forecast this month. “The initial success of zero Covid and Xi’s personal attachment to it makes it impossible to change course.”