Chinese unrest over lockdowns upends global economic outlook

People gather on a street in Shanghai where protests against China's zero-Covid policy took place.

Patricia Cohen

The swelling protests against severe COVID-19 pandemic restrictions in China — the world’s second-largest economy — are injecting a new element of uncertainty and instability into the global economy when nations are already struggling to manage the fallout from a war in Ukraine, an energy crisis and painful inflation.

For years, China has served as the world’s factory and a vital engine of global growth, and turmoil there cannot help but ripple elsewhere. Analysts warn that more unrest could further slow the production and distribution of integrated circuits, machine parts, household appliances and more. It may also encourage companies in the United States and Europe to disengage from China and more quickly diversify their supply chains.

Millions of China’s citizens have chafed under a tight lockdown for months as the Communist Party seeks to overcome the spread of the COVID-19 virus, three years after its emergence. Anger turned to widespread protest after an apartment fire last week killed 10 people and comments on social media questioned whether the lockdown had prevented their escape.

It is unclear whether the demonstrations flaring across the country will be quickly snuffed out or erupt into broader resistance to the iron rule of its top leader, Xi Jinping, but the most significant economic damage stems from the lockdown.

“The biggest economic hit is coming from the zero-Covid policies,” said Carl Weinberg, chief economist at High Frequency Economics, a research firm. “I don’t see the protests themselves being a game changer. The world will still turn to China for what it makes best and cheapest.”

Asked how the Biden administration assessed the economic fallout from the latest unrest, John Kirby, coordinator for strategic communications at the National Security Council, said on November 28, “We don’t see any particular impact right now to the supply chain.”

Concerns about the economic impact of the spreading unrest in China, nonetheless, appeared to be partly responsible for a decline in world markets. The S&P 500 index closed 1.5 percent lower, while the dollar, often a haven in turbulent times, moved higher. Oil prices began the day with a sharp drop before rebounding.

The sheer magnitude of China’s economy and resources makes it a critical player in world commerce. “It’s extremely central to the global economy,” said Kerry Brown, an associate fellow in the Asia-Pacific program at Chatham House, an international affairs institute in London. That uncertainty “will have a massive impact on the rest on the world.”

China now surpasses all countries as the biggest importer of petroleum. It manufactured nearly 30 percent of the world’s goods in 2021. “There is simply no alternative to what China offers in terms of scale and capacities,” Brown said.

Delays and shortages related to the pandemic prompted many industries to re-evaluate the resilience of their supply chains and consider additional sources of raw materials and workers. Apple, which recently announced that it expected sales to decline because of stoppages at its Chinese plants, is one of several tech companies that have shifted a small portion of their production to other countries, like Vietnam or India.

The tilt by some companies away from China predates the pandemic, reaching back to former President Donald Trump’s determination to start a trade war with China, a move that resulted in a spiral of punishing tariffs.

Yet even if business and political leaders want to be less reliant on China, Brown said, “the brute reality is that’s not going to happen soon, if at all. We shouldn’t kid ourselves that we can quickly decouple.”

China’s size is a lure for American, European and other companies looking not only to make products quickly and cheaply, but also to sell them in great numbers. There is simply no other market as big.

Tesla, John Deere and Volkswagen are among the companies that have bet on China for future growth, but they are likely to suffer some setbacks at least in the short run. Volkswagen announced last week that its sales in China had stagnated this year, running 14 percent below expectations.

The protests highlight the political risks associated with investing in China, but analysts say the recent wave doesn’t reveal anything that investors didn’t already know.

“Many investors will be looking ahead and positioning their portfolios now for the reopening,” said Nigel Green, CEO of deVere Group, a financial advisory firm. They will be “seeking to take advantage of the country’s transition from an export economy to a consumption one,” he added.

Luxury brands continue to stake their future on growth in China.

As interconnected as the global economy is, one way in which China’s slowdown may be helping other nations is by keeping down the price of energy. Over the past 20 years, the growth of the Chinese economy has been a primary driver of global demand for oil and hydrocarbons in general.

Energy experts say rising numbers of COVID-19 infections and growing doubts that China will ease lockdown restrictions in major cities are a major reason that oil prices have dropped over the past three weeks to levels last seen before the Russian invasion of Ukraine in late February.

“Chinese demand is the largest single factor in world oil demand,” said David Goldwyn, a senior energy diplomat in the Obama administration. “China is the swing demander.”

As the Chinese economy has softened in the grip of COVID-19 lockdowns, fewer oil tankers have sailed into Chinese ports in recent weeks, forcing the major Middle Eastern and Russian oil producers to lower their prices. Now spreading protests create another uncertainty about future demand.

Chinese oil demand is expected to average 15.1 million barrels a day this quarter, down from 15.8 million a year ago, according to Kpler, an analytics firm.

As for supply chain disruptions, Neil Shearing, chief economist at Capital Economics, a research firm, said he thought excessive blame had been heaped on China. “Everything has been framed around supply shortages,” he said, but in China, industrial production increased during the pandemic. The problem was that global demand surged more.

For now, the biggest economic impact will be within China, rather than on the global economy. Sectors that depend on face-to-face contact — retail, hospitality, entertainment — will take the biggest hit. Over the past three days, measures of people’s movements have drastically fallen, Shearing said.

He added that more people were quarantined now than at the height of the omicron epidemic last winter. The wave of infections and the government’s response to it — not the protests — are what’s having “the biggest impact on China’s economy,” he said.

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