Chinese Economy under Fresh Pressure due to Resurgence of Omicron and Russia-Ukraine conflict

According to recent data released by Chinese customs, the country’s exports registered a growth of 3.9 per cent on a yearly basis in April 2022, marking the lowest growth since July 2020. This slowdown in exports growth is being attributed to corona virus outbreaks in multiple Chinese cities.

In April 2022, China’s exports stood at USD 274 billion, up 3.9 per cent on a yearly basis, imports stood at USD 223 billion, recording no growth or contraction. In total, China’s trade grew 2.1% in April. Chinese economy had been driven in a large measure by the external sector in the last few decades. Notwithstanding slowdown in exports in the month of April, the data show that in the first four months of 2022, China’s trade amounted to USD1.9 trillion, up 10.1% year-on-year. The present decline is marginal but it could worsen in immediate future.

Chinese officials cite outbreaks of Omicron across multiple domestic cities as one of the major reasons behind China’s slowing trade. Shanghai, one of the major logistical hub implemented city-wide movement restrictions to check the spread of virus, which adversely affected many factories’ production capacity while logistics remained disrupted.

The first proximate consequence of slowdown in trade on Chinese economy is a fall in its foreign exchange reserves by USD 68 billion in April, the biggest drop in five and a half years. Apart from the slowdown in exports, depreciation in the Chinese Yuan is another reason which led to downward valuation effect on China’s foreign exchange reserves. As the dollar appreciated against the Yuan, foreign investors dumped Chinese stocks amid worries about the slowing economy.

The country’s foreign exchange reserves fell to USD 3.12 billion in April from USD 3.188 trillion in March, the biggest monthly drop since November 2016.

China’s State Administration of Foreign Exchange (SAFE) attributed 2% drop in foreign exchange reserves to valuation effect as the dollar gained against other major currencies and change of global asset prices. The Yuan fell 4% against the dollar in April while the dollar rose 5% in April against a basket of other major currencies.

As the expectations about performance of the Chinese economy have also weakened due to mounting worries about the impact of prolonged Covid-19

lockdowns and the fallout of the Ukraine war, the overseas investors extended their selling of Chinese shares into April. It is notable that China’s foreign exchange reserves dropped by USD 130 billion in the first four months as against an increase of USD 33.6 billion in 2021. The uncertainty over the Ukraine war and recovering production capacity overseas also squeezed China’s share of global trade. The new export orders component of the official manufacturing purchasing managers’ Index hit a two-year low in April.

While rest of the world has started rebooting life and work while living with Covid, China still resorts to strict measures like border curbs, mandatory quarantine and repeated mass testing to stop Covid transmission.

It has its own cost. Morgan Stanley has forecast that global economic growth would be less than half of 2021 due to risks from the Russia-Ukraine conflict and the surge of new strand of Covid virus in China. Global growth in 2022 is likely to be subdued at 2.9% in 2022 as against 6.2% in 2021. The IMF expects a GDP growth of 4.4% and 5.1% in 2022 and 2023 respectively as against about an estimated 8.1% in 2021.

The trade sector, which accounts for about a third of China’s gross domestic product, employing about 186 million people is losing momentum as widening anti-virus curbs have caused disruptions in supply chains and port operations. Mainland China reported well over 1000 new confirmed Covid cases a day since March 12 which doubled by the end of the month.

Despite apparent changes in virus’ severity, China maintained stringent zero- Covid policy by resorting to regional lockdowns, tighter government restrictions on international travel and stay home policies including in Shanghai, Beijing, Shenzhen. This approach of handling the pandemic slackens the prospects of global and Chinese economic recovery.

China is also trapped in a fear psychology given its crowded cities and lack of certainty about effectiveness of its own pandemic vaccine. A recent report prepared by researchers at Shanghai’s Fudan University and published in the reputed Scientific Journal Nature warned China to continue with its zero-Covid policy lest it would risk a “tsunami” of corona virus infections resulting in 1.6 million deaths especially due to its reliance on the less effective domestic vaccine.