Moneycontrol Pro Panorama | China is catching a cold. Expect the global markets to sneeze

The practice of lockdown has fuelled public anger as people found themselves locked in their homes during minor outbreaks.

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China, the largest consumer of most commodities globally, is seeing unprecedented protests against the country’s strict COVID restrictions. Amid a fresh bout of infections, China reimposed stringent restrictions, triggering an unprecedented backlash from residents. The protests unsettled global markets, which are already struggling to cope with inflation and the Russia-Ukraine war.

China has reportedly eased some curbs and many believe that the unrest will pave the way for a complete reopening. But the return to normalcy will not be smooth. The country was slow to vaccinate its elderly population. And as the country’s leadership continues to insist on its zero COVID policy, investors are worried about the economic fallout.

“While a disorderly (a quick) exit from China's COVID zero policy could ultimately prove a positive for global demand, getting to that point will be an exceptionally bumpy ride for the world's financial markets,” analysts at ING said in a note.

A turbulent China is not good news for the global economy. The country is the world’s largest and cheapest producer of many commodities, intermediate and finished goods. A prolonged COVID fight and restrictions can not only weigh on the country’s economic output but also impact companies across the globe. Many manufacturing companies in India depend on China for feedstock and raw materials. A squeeze in supplies from China can drive up prices.

According to Nomura, as much as 21.1 percent of China’s total gross domestic product (GDP) is currently under lockdown. The level of restrictions is similar to that seen in April 2022 when Shanghai was placed under lockdown, explain analysts. The restrictions have triggered concerns about global demand for raw materials sending prices of crude oil and metals lower.

Lockdowns bring two risks for commodities, explains Ravi Ananthanarayanan. One is the hit to the consumption of commodities by industries. The other is the disruption to industrial output.

India being a large importer of crude oil will benefit from lower prices. But investors should also brace for supply chain constraints. Moreover, a constrained China can derail the global economy and markets, warns Shishir Asthana. “A weak China is a huge threat to global growth,” he writes.

S&P Global Ratings has pared its 2023 global growth projections by a good percentage point. While India saw modest cuts in its GDP forecast, a slowing global economy does not augur well for the domestic economy. “The global demand slowdown will intensify in 2023, weighing on Asia-Pacific exports,” S&P Global said in an update on the Asia-Pacific region.

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Technical Picks: Turmeric, MMTC, TI India and ACC (These are published every trading day before markets open and can be read on the app).

Vatsala Kamat
Moneycontrol Pro