China’s economic hazards will fuel global inflation

A surge in Covid-19 cases in China has left the economy in a “mess.”

With Shanghai under lockdown and infection rates soaring, business activity across the country has taken a massive hit.

Ports dotted around China’s largest city are grinding to a halt with business confidence nosediving in the world’s second-largest economy.

“In March, Covid-19 flared up in several regions across China, disrupting manufacturing supply chains and impacting production,” Wang Zhe, a senior economist at Caixin Insight, said after the group published its Purchasing Managers’ Index or PMI.

For a battered global economy unhinged by rising inflation, the timing could not be worse. 

By the numbers:

• The Caixin services PMI dived to 42.0 last month from 50.2 in February.
• That was the sharpest decline since Covid-19 first surfaced in China two years ago.
• The overall PMI, which includes manufacturing and services activity, slumped to 43.9 from 50.1 during the same period.
• The 50-point mark separates growth from contraction on a monthly basis. 
• Last week, the National Bureau of Statistics revealed that the official PMI contracted in March for the first time since the dark days of 2020.
• The manufacturing sector fell to 49.5 from 50.2 in February, while services eased to 48.4 from 51.6.

What was said: “March was a mess for services,” China Beige Book, the research company, tweeted after Caixin released the data.

Warning signs: “The PMIs probably understated the hit to activity last month. This suggests the economy is contracting at its fastest pace since 2020,” Julian Evans-Pritchard, a senior China economist at Capital Economics, said.

This will be another blow to the global economy which is suffering rampant inflation.

Delve deeper: An Omicron wave has washed across major areas of China, including Shanghai, Jilin, Guangdong, Jiangsu and Shaanxi. In Shanghai, new cases topped 17,000 on March 5 compared to 13,000 on the previous day.

Zero progress: This surge has strained China’s “zero-Covid” policy, leading to growing frustration in a city of nearly 26 million as the lockdown enters its second week in some districts. 

Dark days: “It’s too early to say whether Shanghai has failed or not, but its experiences sounded the warning shot for other regions and cities,” Chen Xi, of Yale University, told state-run Global Times earlier this week.

Ports in a storm: A bottleneck has started to appear in Shanghai ports as supply chains reach breaking point. Containers are stacking up and unloading procedures have been severely hit.

Big picture: This will be another blow to the global economy which is suffering rampant inflation amid spiraling commodity prices, trade tensions and Russia’s illegal war in Ukraine.

Inflation bubble: “The world economy may be on the brink of a new inflationary era, according to Agustin Carstens, the head of the Basel-based Bank for International Settlements, or the central bank of central banks,” The Guardian media group reported on April 5.

China Factor comment: An economic hurricane is threatening the global economy. The shock of sky-high prices in commodity sectors such as energy and food is stifling growth as basic living costs soar. It also comes at a time when global government debt is poised to rise by 9.5% to a record US$71.6 trillion in 2022.