China alert to global economic risks from Omicron, but ‘financial turmoil’ of early pandemic unlikely

The new Omicron variant adds more uncertainty to the global economic recovery and China will closely follow its potential impact on trade and international supply chains, the Ministry of Commerce said on Thursday. “In terms of the issues and difficulties facing foreign trade companies, we will review policies in a timely manner and deal with them in a scientific and proper way,” said ministry spokeswoman Shu Jueting. How the new variant will affect China’s manufacturing sector is not yet clear, but it might be a double-edged sword for exports, according to Capital Economics. “Its global spread could continue to lift demand for China’s exports, but it could also exacerbate supply problems if, for example, it triggers closures at ports,” the research firm said in a note on Wednesday. Chinese manufacturing enters ‘critical period’ with an eye on hi-tech China’s exports helped power its impressive recovery from a historic first quarter contraction last year, thanks to strong demand for medical supplies and consumer electronics in particular. Though exports have continued to defy expectations this year, analysts have been warning of a possible slowdown. If global measures to prevent the virus continue next year, the pandemic will no longer be an external or short-term shock, said Lei Da, an economics professor at Renmin University. “So its impacts on the supply side can be huge,” Lei said at an webinar held by China Macroeconomy Forum (CMF) on Wednesday. In the long run, we believe that the financial turmoil similar to that of March 2020 won’t happen again Wang Jinbin Despite adding to uncertainty, the Omicron variant may create only a small shock, rather than considerable turmoil for the global economy, as governments are more experienced in dealing with the virus, according to economists. “Because of the uncertainty of the pandemic, small turbulence is normal. But in the long run, we believe that the financial turmoil similar to that of March 2020 won’t happen again,” Wang Jinbin, who is also an economics professor at Renmin University, said at the webinar. The global capital market will still be full of risks in 2022, according to Cao Yuanzheng, chairman of BOC International Research. “But in general, the global economy will enter a state of normalising: the growth rate will be relatively flat, and the inflation level will continue to be high,” Cao said at the webinar. Governments around the world have quickly reacted to the Omicron variant since news broke last Friday of its emergence in South Africa, with multiple countries, including the United States, quickly restoring entry restrictions for travellers from southern Africa. “The governments are quite experienced by now, so none were keen to wait and see what would happen next,” said Ipek Ozkardeskaya, senior analyst at Swissquote. But new rounds of lockdowns are bad news for economic activity, she added. While the new variant has effectively impeded the reopening plan of many countries, China is likely to continue with its zero-tolerance policy in 2022, analysts say. China defends zero-Covid strategy, says speed vital to stopping spread “While we think there is room to relax excessive public health restrictions on the domestic front, border controls are likely to stay tight in 2022,” said a report from JP Morgan on Monday. China is far ahead of other major economies in its recovery from the pandemic – the country is moving towards contraction, while others are still expanding, said Xiao Lisheng, an economist at the Chinese Academy of Social Sciences, at the forum. As a result, China and the US could plot very different monetary paths next year. While US Federal Reserve chair Jerome Powell said on Tuesday the financial authority would consider speeding up tapering of its bond-buying stimulus, Beijing is mulling looser monetary policy next year, analysts say. Nevertheless, broad monetary easing from China appears unlikely, particularly with strong fiscally-led construction activity through to the new year, according to a note from Everbright SHK Research on Wednesday. Guan Tao, chief economist at BOC International, expressed concern over the narrow interest rate gap between China and the US given the divergence between American and Chinese monetary policy. “It will accordingly lower the attractiveness of yuan assets, reduce the inflows, or even trigger capital outflows,” he wrote in an article on Sina.com on Monday.