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Lockdowns Cloud China’s Short-Term Outlook, But We Expect a Second-Half Recovery

By Patricia Ribeiro, Nathan Chaudoin
Workers in a factory.

Key Takeaways

New lockdowns resulting from China’s “zero-COVID” policy are pressuring factory production and consumption.

We expect second-quarter economic data to suffer as factories remain closed, and consumers face mobility restrictions.

Our outlook for the second half of 2022 is more encouraging due to the government’s monetary and fiscal policies and pledged support of financial markets.

Zero-COVID Policy Is Weighing on China’s Economy and Markets

The Chinese economy saw a solid recovery in early 2022 after fiscal and monetary policy helped stimulate investment, production and consumer demand.

But soon thereafter, an omicron variant fueled a surge in coronavirus cases in Shanghai, Beijing and other areas. The government responded with renewed restrictions and mass testing in line with its strict zero-COVID policy. As a result, commercial and consumer activity slowed, and Chinese equities suffered.

The lockdowns have exacerbated global supply chain disruptions and placed more inflationary pressures on the global economy. These economic conditions were already weighing on global growth due to the combination of the war in Ukraine and the lingering pandemic.

Second-Quarter Outlook Softens Amid Headwinds

Year-over-year gross domestic product (GDP) and earnings growth are down significantly, and equity markets have declined sharply since mid-March. On April 25, two major Chinese stock indices saw their largest one-day drops since the onset of the pandemic.1 The lockdowns have been disruptive on many fronts:

Factory Closings

Shutdowns have halted manufacturing at facilities in several regions. Automobiles (including electric vehicle components), semiconductors and industrial equipment are among the hardest-hit sectors.

Port Congestion

Shipping backlogs, including loading and unloading cargo, have increased. More than 500 ships, about 30% of the global backlog, are stranded outside Shanghai.2

Demand Disruption

Mobility restrictions are dampening consumption and tamping demand for consumer goods, luxury items and oil.

Trucker Shortage

Tightened testing requirements for truckers created a shortage of qualified drivers, further constraining logistics networks. These factors have dampened China’s economic outlook for the second quarter. It will take some time for them to play out and growth to return.

We Anticipate Stabilizing in the Second Half of 2022

We consider the macroeconomic and geopolitical issues weighing on China’s economy to be temporary. Consequently, our outlook remains positive for the second half of the year and into 2023. Our reasons for optimism include:

Continued Policy Easing

China’s central bank is committed to continuing its accommodative policies. Just as moves made in late 2021 helped fuel growth early this year, we think additional policy easing will buoy economic results later this year.

More Clarity in Government Regulation

China’s government continues to adjust its regulatory policy to promote fairness and economic inclusion. While this change has weighed temporarily on some high-profile technology companies, it has helped others.

The government has publicly pledged to support markets and encourage stabilization. It has taken steps to support the housing market and emphasize new infrastructure spending, including digitizing the industries tied to green initiatives such as electric vehicles and renewable energy.

Pent-Up Demand

Lockdowns and mobility restrictions have significantly slowed demand for consumer goods, travel and leisure, and capital improvements. We expect demand to uncoil and dramatically improve once COVID is back under control and the government lifts restrictions.

Lessons of Earlier COVID-19 Response

As one of the first countries to respond to the coronavirus, China has significant experience trying to contain it. Local mobility restrictions can address breakouts. Local governments also have options that Western democracies lack for blanket testing and restrictions to help contain new flare-ups within their regions.

The recent politburo meeting suggests the Chinese government is aware of the need to balance its commitment to battle the spread of COVID-19 with support for economic development.

While its zero-COVID policy will likely remain in place in the near term, we expect the government to focus on limiting containment to local areas, which should allow a quicker reopening of China’s economy.

Patricia Ribeiro
Patricia Ribeiro

Co-Chief Investment Officer

Global Growth Equity

Nathan Chaudoin
Nathan Chaudoin

Vice President

Sr. Client Portfolio Manager

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Rebecca Feng and Dave Sebastian, “Chinese Markets Tank as Investors Worry About Covid-19 Lockdowns,” Wall Street Journal, April 25, 2022.

Eamon Barrett, “China’s COVID-19 lockdown is inflaming the world’s supply chain backlog, with 1 in 5 container ships stuck outside congested ports,” Fortune, April 21, 2022.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.