Checking In On China

The Covid-19 pandemic isn't over in China, as the country's zero-tolerance approach to the virus has prompted another massive lockdown. The 21 million people living in Chengdu, China's fourth-largest city and the capital of Sichuan province, have been ordered to stay at home until an outbreak is contained.

It's the latest hit to the world's second-largest economy, which was already contending with a relatively delayed exit from lockdowns and a property-sector bust. Given China's size and massive trade presence, that's bad news for the global economy.

Barron's Reshma Kapadia wrote today:

China has accounted for a larger share of global growth than the U.S., Europe and Japan combined over the past decade, which means its pain tends to be felt across the global economy. Whereas China’s growth has helped the global economy out of tough spots in the past, this time the country has been stuck in an economic rut, hurt by a property slump, and harsh Covid-related lockdowns that brought cities like Shanghai and Beijing to a standstill, and battered consumer and business confidence. On top of that, officials have been unwilling to roll out massive stimulus.

China's ruling Communist Party is holding a mid-October meeting where top leadership is selected and President Xi Jinping is expected to secure an unprecedented third term. Officials have prioritized keeping Covid outbreaks to an absolute minimum ahead of the event, and have added restrictions in other areas of the country, further dampening consumer spending and manufacturing activity.

That's visible in a unique barometer. Reshma continues:

Air quality is often a good gauge of economic activity—and for much of the year Chengdu’s skies have been murky, with the economy humming along even as other major cities like Beijing, Shanghai, and Shenzhen saw disruptions. But the air has turned markedly cleaner in the last couple of days, suggesting a slowing in traffic and factory production, says Nicholas Colas, co-founder of DataTrek Research.

The continued Covid-19 lockdowns have made doing business in China tougher for domestic and international businesses, and kept investors wary. China's Shanghai Composite Index is down 13% this year and about even with its levels two years ago. Even after this year's stumble, the S&P 500 is up roughly 25% in that period.

More from Reshma:

China’s Zero-Covid approach is a major reason pessimism among U.S. companies operating in the country has hit an all-time high in a survey out this week from the U.S.-China Business Council. The disruptions to sales and supply chains created by these lockdowns is bad news for the myriad companies that operate in China, including Tesla and Apple to Nike and Qualcomm that are also trying to navigate an increasingly fractious U.S.-China relationship. Nvidia, for example, warned its sales could take as much as a $400 million hit from new licensing requirements as the U.S. restricts the sale of some of its most advanced chips to China. Analysts have expected these types of restrictions to increase as both countries try to shore up their national security—and an array of products and services fall within that broad umbrella—in what some describe as a new tech Cold War.

Back in the U.S., there's a possible silver lining in China's malaise, Reshma writes. Renewed Covid lockdowns and other economic troubles in China will weigh on demand for energy, easing the upward pressure on oil prices and potentially helping to bring down inflation. That's good news for the Federal Reserve and investors alike.

Read the rest of Reshma's report here.