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Delta outbreak in China can hurt the second largest economy

Despite the pandemic, the IMF had predicted that China will surpass US as the largest economy of the world because China was able to cope with the pandemic and the US was not. But now the Chinese economy is under threat due to spread of Indian variant.

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Beijing’s ability to balance its virus response and economic growth is facing a big test. In the past few days a dozen provinces have imposed travel curbs, mass testing and other strict measures to contain an outbreak of the highly transmissible Delta strain of coronavirus that has infected nearly 500 people.

China has given enough vaccine shots to fully inoculate 60% of its population, according to Reuters’ vaccination tracker estimates. Yet authorities are still taking a zero-tolerance approach to new cases.

Some cities have banned residents from leaving, cancelled major events and closed tourism sites. That includes Wuhan, where the virus was first detected in 2019. In Jiangsu province, officials have shut out of caution over 40,000 entertainment centres used for playing cards and mah-jong.

Read more: COVID Delta arrives China to haunt Wuhan under lockdown

The services sector, which is still recovering from the initial lockdowns last year, will be hit hardest for now. Household consumption spending booked a two-year compound annual growth rate of 7% in the second quarter, still lower than the 9% observed in 2019, analysts at China International Capital Corporation estimated.

Shelved travel plans and cancelled movie showings just ahead of the summer holiday could hit companies like Trip.com (9961.HK) and Maoyan Entertainment (1896.HK) hard. Airline and railway authorities already are refunding tickets.

The broader economic impact of the measures taken so far should be limited. Goldman Sachs analysts reckon it could shave less than one percentage point off China’s annualised third-quarter GDP. If this latest virus wave keeps spreading, though, the country risks undershooting the government’s annual growth target of 6%.

The timing of the spike is also unfortunate, as it adds to growth worries caused by recent bad floods as well as a flurry of crackdowns in property and other sectors.

As it stands, the People’s Bank of China, which has been withdrawing pandemic-induced stimulus, will have little choice but to keep monetary policies more accommodative. There may also be even more restrictions on travel in and out of the country, as this latest outbreak appears to have been traced to passengers who flew from Russia to the major transportation hub of Nanjing.

The current short, sharp shock may yet nip this outbreak in the bud. If not, Beijing’s penchant for harsh restrictions to eradicate all locally transmitted cases despite a high vaccination rate will cast a much larger pall over the economy.

Context News

China reported 85 new confirmed coronavirus cases in the mainland for Aug. 4, with 62 of them locally transmitted, the National Health Commission said in a statement on Aug. 5.

The recent virus resurgence is associated with an outbreak in Nanjing, the capital of Jiangsu province, in late July, with the Delta variant mostly likely introduced on a flight from Russia, Chinese officials have said.

Read more: Delta variant could be heading towards Khyber-Pakhtunkhwa

All 31 provincial-level regions in the Chinese mainland have urged citizens not to leave the province where they live unless it is necessary, state news agency Xinhua reported on Aug. 3. Among other measures, 23 railway stations have halted ticket sales for Beijing-bound passengers. All flights at the airports in Nanjing and Yangzhou have been suspended.

The city of Wuhan on Aug. 3 announced it will test its 12 million residents for the coronavirus after confirming its first domestic cases of the Delta variant. Wuhan, where the virus was first detected, had previously reported no local coronavirus cases since May 2020.

Reuters with additional input by GVS News Desk

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