China lockdowns cost economy $63 billion a month, academic says

Police patrol a street in Shanghai as parts of the city are locked down following China's largest Covid-19 outbreak in two years. PHOTO: EPA-EFE

HONG KONG (BLOOMBERG) - China's Covid-19 lockdowns are likely costing the economy 295 billion yuan (S$63 billion) a month, or 3.1 per cent of lost gross domestic product (GDP), and the impact could double if more cities tighten restrictions.

That is a minimum estimate from an economist at the Chinese University of Hong Kong (CUHK)  based on the assumption that cities generating about 20 per cent of China's GDP are currently imposing targeted lockdowns. That cost would double if those areas had to follow Shanghai and impose stricter policies requiring most residents to remain at home.

China's tough measures mean "the economic cost of lockdown is clearly bigger than we see in other countries", said Mr Zheng Michael Song, a CUHK professor who is part of a research team using real-time data to measure the impact of lockdowns. The 3.1 per cent estimate is "conservative", he added, as it does not include the effect on incomes through inflation.

Mr Song and his team used data on the location of nearly two million trucks which criss-cross China, and whose movements are highly correlated with local economic activity.

By including the impact on nationwide inflation and spillover effects from supply chains, the effect on the economy would be much worse.

A strict lockdown in Shanghai alone could reduce China's real GDP by 4 per cent, Mr Song and his co-authors estimated. If China's four largest cities all underwent a strict lockdown together, national inflation-adjusted GDP would fall 12 per cent for the duration of the shutdowns.

A worst-case scenario would be a lockdown of all cities for one month, which would cut national GDP by 53 per cent over that period.

China has been fighting a wave of the more infectious Omicron variant of coronavirus since the beginning of the month, with daily confirmed cases rising above 6,000 this week. Goldman Sachs estimates areas with mid- to high-risk outbreaks under some form of lockdown restriction account for about 33 per cent of GDP.

The key to the prospects for China's economy will depend on whether the highly infectious Omicron variant will require more intense or longer lockdowns.

Shanghai initially tried a targeted approach, but that did not bring down case numbers, and it said this week it would require half of the city to stay at home in turn over a total of eight days while mass testing and isolation are carried out.

In Shanghai, which began introducing coronavirus restrictions earlier this month, trucking data indicates economic activity in the city fell 40 per cent below normal even before the half-city lockdown began on Monday (March 28).

Activity could fall further still if the city follows the path of Changchun, the capital of Jilin province in the north-east, which imposed a lockdown on March 11. It has seen economic activity levels plunge by more than 66 per cent from normal levels since then, according to the trucking data.

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Shenzhen appears to represent a best-case scenario of what China's lockdowns can achieve against Omicron. The city's week-long lockdown, during which residents were tested three times, appears to have been relatively light - it reduced economic activity only by about 34 per cent, data tracked by the study suggested.

The shorter duration also reduced the economic impact, although truck activity was still 20 per cent below normal a week after the lockdown ended.

The team previously estimated that China's lockdowns in the first quarter of 2020 led to a 19.4 per cent decline in real GDP, compared with the official figure of a 6.9 per cent decline. Economists at Nomura Holdings wrote this weekend that China's economy faces its worst outlook since that quarter due to the spreading virus outbreaks.

Mr Song forecasts a better outcome than 2020 if Shenzhen serves as a model.

"The one-week full lockdown in Shenzhen seems to have been more effective," he said. If other cities can achieve a similar result, "the overall performance of the economy will be much better even if a third to half of the cities see Covid-19 cases, as they did in early 2020".

It is still possible for China's economy as a whole to grow even if lockdowns reduce economic output, if other regions not under restrictions increase their output. But that becomes less likely the larger the lockdown impact is.

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