The mounting protests against severe pandemic restrictions in China – the world’s second-largest economy – are bringing a new element of uncertainty and instability to the global economy, as countries already grapple with the fallout from a war in Ukraine, an energy crisis and painful inflation .
For years, China has served as the factory of the world and a vital engine of global growth, and the turmoil there cannot but continue elsewhere. Analysts warn that more unrest could further slow production and distribution of integrated circuits, machine parts, home appliances and more. It could also encourage companies in the United States and Europe to pull out of China and diversify their supply chains more quickly.
Millions of Chinese citizens have agonized for months under a tight lockdown as the Communist Party scrambles to stem the spread of the Covid-19 virus three years after its rise. Anger turned to widespread protest after an apartment fire killed 10 people last week and comments on social media questioned whether the lockdown had prevented their escape.
It is unclear whether the demonstrations that are flaring up across the country will soon die down or erupt into a wider backlash against the ironclad rule of its top leader, Xi Jinping, but so far the biggest economic damage has come from the lockdown.
“The biggest economic blow comes from the zero-Covid policy,” said Carl Weinberg, chief economist at High Frequency Economics, a research firm. “I don’t see the protests themselves as a game changer.”
“The world will still turn to China for what makes it best and cheapest,” he added.
When asked how the Biden administration assessed the economic fallout from the latest turmoil, John Kirby, coordinator for strategic communications at the National Security Council, said Monday: “We don’t see a specific supply chain impact at this time.”
Concerns about the economic impact of the spreading unrest in China nevertheless appeared to be partly responsible for the downturn in global markets. The S&P 500 index closed 1.5 percent lower, while the dollar, often a haven in turbulent times, moved higher. Oil prices started the day with a sharp drop before recovering.
The sheer size of China’s economy and resources makes it a crucial player in world trade. “It’s extremely central to the global economy,” said Kerry Brown, an associate fellow in the Asia-Pacific program at Chatham House, an institute of international affairs in London. That uncertainty “will have a huge impact on the rest of the world.”
China now surpasses all countries as the largest importer of petroleum. It produced almost 30 percent of all goods in the world by 2021. “There’s just no alternative to what China offers in terms of scale and capabilities,” Brown said.
Delays and shortages related to the pandemic have prompted many industries to reevaluate the resilience of their supply chains and consider additional sources of raw materials and workers. Apple, which recently announced it expected sales to fall due to business interruptions at its Chinese factories, is one of several tech companies that have moved some of their production to other countries, such as Vietnam or India.
The tilt by some companies away from China predates the pandemic and harks back to former President Donald J. Trump’s determination to start a trade war with China, a move that resulted in a spiral of punitive tariffs.
But even if business and political leaders want to be less dependent on China, Mr Brown said, “the brutal reality is that won’t happen anytime soon, if at all.”
“We shouldn’t deceive ourselves that we can disengage quickly,” he added.
China’s size is a lure for American, European and other companies that not only want to make products quickly and cheaply, but also want to sell them in large numbers. There is simply no other market that big.
Tesla, John Deere and Volkswagen are among the companies that have bet on China for future growth, but they are likely to face setbacks at least in the near term. Volkswagen announced last week that sales in China had stagnated this year and were 14 percent below expectations.
The protests highlight the political risks associated with investing in China, but analysts say the recent wave reveals nothing investors didn’t already know.
“Many investors will look ahead and position their portfolios now for the reopening,” said Nigel Green, CEO of deVere Group, a financial advisory firm. They will “try to capitalize on the country’s transition from an export economy to a consumer economy,” he added.
Luxury brands continue to stake their future on growth in China.
As interconnected as the global economy is, one way China’s slowdown can help other countries is by keeping the price of energy low. Over the past 20 years, the growth of the Chinese economy has been a major driver of global demand for oil and hydrocarbons in general.
Energy experts say rising Covid infections and growing doubts whether China will ease restrictions in major cities are a key reason oil prices have fallen over the past three weeks to levels last seen before Russia’s invasion of Ukraine in late February.
“Chinese demand is the single largest driver of global oil demand,” said David Goldwyn, a senior energy diplomat in the Obama administration. “China is the swing claimant.”
With the Chinese economy softened in the grip of the Covid lockdown, fewer oil tankers have entered Chinese ports in recent weeks, forcing major oil producers from the Middle East and Russia to cut prices. Now protests are spreading another uncertainty about future demand.
According to analysis firm Kpler, Chinese oil demand is expected to average 15.1 million barrels per day this quarter, up from 15.8 million a year ago.
As for the supply chain disruptions, Neil Shearing, chief economist at Capital Economics, a research firm, said he thought China had become over-indebted. “Everything is based on supply shortages,” he said, but China’s industrial production increased during the pandemic. The problem was that global demand rose more.
For now, the biggest economic impact will be in China, rather than the global economy. Sectors that rely on face-to-face contact — retail, hospitality, entertainment — will take the biggest hit. Over the past three days, restrictions on people’s movement have fallen dramatically, Mr Shearing said.
He added that more people have now been quarantined than at the height of the Omicron epidemic last winter. The wave of infections and the government’s response to them — not the protests — have “the biggest impact on China’s economy,” he said.
Clifford Krauss contributed reporting from Houston, and Michael D. Shave from Washington.
