When Shanghai tries to resume business, one downtown area last weekend banned residents from leaving their residential complexes again for mass virus testing. Pictured here, in another area, is May 21, 2022, a line near the mall.

Xu Kaikya | Visual China Group | Getty Images

BEIJING – China’s economy will not rebound quickly from the latest Covid outbreak, many economists predict.

Instead, they expect a slow recovery ahead.

When the pandemic first hit in 2020, China moved away from a reduction in the first quarter to an increase in the second quarter. This year, the country is facing a much more transmissible variant of the virus, generally weaker growth and less government incentive.

The latest Covid outbreak, which began in March, hit the metropolis of Shanghai the hardest. About a week ago, the city announced plans to close – and fully open by mid-June.

“For China, the main story is that we saw the light at the end of the tunnel. The worst shifts in the supply chain in China due to the Covid blockade seem to be over, ”said Robin Singh, Morgan Stanley’s chief economist for China during a webinar on Friday.

“But we also believe that the road to recovery is likely to be slow and bumpy,” Sin said.

This is the process of seizures and begins. Last weekend, an area in central Shanghai again banned residents from leaving their residential complexes for mass virus testing. More parts of the Beijing capital have ordered people to work from home, as the daily number of cases has risen to 83 on Sunday, the highest for the city’s latest outbreak.

Example: German automaker Volkswagen, which has plants in the two most affected regions this year, said on Wednesday that its production sites in China are working and working, but Covid’s control is disrupting the supply chain.

The automaker said it could not give a specific figure on production levels as the plants are joint ventures working with local partners.

Although the number of Covid cases in the country has fallen over the past month, pockets of new cases from Beijing to southwest China have prompted orders to stay home and mass testing. Freight volumes remain below normal.

“Many regions and cities have tightened restrictions at the first sign of local cases,” said Meng Lei, a Chinese stock strategist at UBS Securities, in a note last week.

“Our case studies in Shanghai, Jilin, Xi’an and Beijing show that disruptions in logistics and supply chains are the most painful points affecting production resumption,” Maine said. “Therefore, the resumption of work is likely to be gradual, not overnight.”

The policy cycle is “interrupted”

The Chinese government is sticking to its tough “dynamic zero covid” policy, despite the emergence this year of a high-speed omicron option.

The most significant “impact” of Covid’s revival is that it “interrupted” the usual policy-making schedule, said Dan Wang, chief economist at Hang Seng Bank China of Shanghai.

She said the latest wave of cases and blockades really began only after the central government announced its annual economic plan at the March Two Sessions parliamentary session.

In China’s managed economy, this annual meeting is a critical part of the cycle of developing and implementing national policies – in different departments and regions.

Disruption of supply chains and dim consumption can be managed, but once the schedule is interrupted, “it’s hard to get it back to its original path quickly,” Wang said.

There are so many different economic goals that “you have to make a lot of trade-offs between different ones [government] departments, “she said.” This has made the policy process extremely slow and backward. “

The Information Bureau of the State Council of China, the country’s top executive body, did not immediately respond to CNBC’s request for comment.

This year, the policy is especially important for officials before the next reshuffle, scheduled for the fall. Chinese President Xi Jinping is expected to remain in the unprecedented third term.

Twice less incentives than in 2020

In early March, at the “Two Sessions”, Beijing set goals such as GDP growth of “about 5.5%.” But that’s about 1 percentage point or more than the forecasts of many investment banks, which have repeatedly lowered their growth estimates in China as Covid’s blockades persist.

Wang maintains a relatively high forecast of 5.1% as she expects China to increase incentives and weaken Covid’s tight controls later in the summer.

But so far, almost two months after Shanghai was severely closed, politicians still needed to make major changes.

In terms of interest rates or fiscal policy, the level of government incentives is still about half of what was at the height of the 2020 pandemic, said Singh of Morgan Stanley.

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With the exception of unemployment, most economic indicators did not reach worse than the beginning of 2020.

Among other measures, the central government announced cuts in taxes and fees for small businesses, and began lowering mortgage rates. But the impact, especially on the massive real estate sector, can take some time.

Singh noted that even without Covid, easing real estate policies will take three to six months to affect home purchases.

Other parts of China are buzzing together

However, it is also possible that growth in China could happen faster than many expect.

“The experience of the last two years shows that the recession caused by Covid tends to end quickly, especially with prompt and powerful political reactions,” said Larry Hu, Macquarie’s chief economist for China, in a note last week.

For most of China, work continues, even if there are additional requirements for virus testing.

About 80% of production in southern China has returned to normal. Despite the fact that in March, a major city in the Shenzhen region closed almost all businesses for about a week, the movement of products by truck within the province “in order” due to the very low number of Covid cases in the region, Klaus Zenkel, chairman of the South China branch of the EU Chamber of Commerce in China, told CNBC on Friday.

Members of the southern province of Guangdong – the production center – “everyone is busy, everyone has something to work on,” – said Zenkel. He noted that companies are keeping their warehouses fuller than before to prevent a long-term shortage problem.

But “the unpredictability is there,” he said. “You don’t know what will happen.”

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