China’s Unrelenting Lockdowns Likely to Worsen US Inflation: Analysts

Workers wearing personal protective equipment (PPE) are seen at an entrance to an alley in a neighbourhood under lockdown in Beijing on May 24, 2022. Jade Gao/AFP via Getty Images

The U.S. economy is likely to face fresh inflationary pressures from China, where on-and-off COVID-19 lockdowns have slowed production in a wide range of areas from chips to Christmas trees, ravaging global supply chains.

The Chinese regime’s heavy-handed measures to contain the fast-moving Omicron variant have brought major industrial and commercial centers, such as Shanghai, to a halt.

In Shanghai, which is more than eight weeks into a lockdown, most COVID-19 restrictions remained in place as of May 24, though officials recently declared the city had achieved the “zero-COVID” milestone. The indicator, according to officials, means all infections were reported in centralized quarantine facilities or residential communities under lockdown, rather than in other areas.

Shanghai officials said they plan to gradually lift the lockdown from June 1, though fenced-in residents have expressed skepticism after seeing their hopes dashed time and again over the past two months.

The prolonged restrictions have inflicted pain on the country’s economy. With workers confined in their homes, factories forced to shut, and truckers struggling to move key components, output from Shanghai’s industries nosedived 61.5 percent in April from a year earlier, the municipal statistics bureau said. The whole country’s factory production in April slid to its worst level since the onset of the pandemic.

As the world’s largest manufacturer, China’s lockdowns have disrupted production lines of many multinational companies ranging from carmakers to fashion. The latest warning is from Swedish electric-car maker Polestar, which cut its delivery forecast this year by 15,000 units.

“The reduction for 2022 is 100 percent attributable to the lockdowns in China,” Polestar said in a May 19 statement.

Consumers in the United States have also started to feel the spillover effects from the shortage of goods. Hospitals across the country had wrestled with a lack of a chemical used in X-rays due to the shutdown of GE Healthcare’s factory in Shanghai.

The supply chain disruptions could potentially push up prices, adding pressure to the United State’s already bleak inflation outlook, according to Edward Huang, a Taiwan-based economic analyst. For example, the price of Christmas decorations or small gifts may increase after the recent lockdown of Yiwu, said Huang. The eastern Chinese city of Yiwu, which experienced an eight-day citywide lockdown earlier this month, is an export center that produces everything from plastic Christmas trees to presidential campaign merchandise.

The upward pressure on the price of goods could offset the U.S. Federal Reserve’s efforts to cool the overall prices, Huang added. The Fed in May implemented its largest interest rate hike since the early 2020s as inflation hit a 40-year high.

Worse Impact Than Ukraine War

The impact of China’s lockdowns on the global supply chain is more severe than that of the war in Ukraine, said the head of Deutsche Post DHL Group’s freight business, adding the impact will be felt after the curbs are lifted.

“After an opening, traffic jams will probably form in front of U.S. and European ports,” DHL’s Tim Scharwath told Reuters on May 23, adding that “it will take longer than we had thought until the trade system normalizes again.”

A container ship sits docked at the Port of Oakland in Oakland, California on May 20, 2022. Justin Sullivan/Getty Images

Scharwath suggested that supply chain disruptions could last beyond the Christmas season and into next year. The remark echoes Fitch Ratings’ warning that the disruptions are “unlikely to be resolved rapidly” as U.S. ports are struggling with staffing shortages and constraints on distribution channels.

“Even before the latest lockdown in China, the time taken to transport freight from Asia to the US West Coast was twice as long as it was at the start of the pandemic, while shipping rates are six times higher than they were in early 2020,” Fitch Ratings said in a notice released on May 10. The lockdown in Shanghai has built up a backlog at ports, which would result in new congestion at the west coast ports this summer, it said.

“As supply-chain disruptions persist, container freight rates could remain elevated or increase,” it added.

No End in Sight

COVID-19 lockdowns tend to only have short-term impacts, analysts said, adding that supply chain disruptions could be gradually improved once cities reopened.

But the biggest uncertainty comes from the Chinese regime’s unwavering implementation of its “zero-COVID” policy, they said, meaning cities across the country may repeatedly experience lockdowns and subsequent reopening.

The Chinese regime has held tight to its zero-tolerance approach. Vice Premier Sun Chunlan, who often appears at COVID-19 hotspots delivering the communist regime’s instructions, inspected Beijing on May 23, official news agency Xinhua reported. Sun urged officials to implement thorough measures cutting the transmission of the virus and adhering to the zero-COVID policy, according to the report.

The draconian approach is aimed at eliminating any infection among communities by mass testing and quarantining everyone at risk. In one example of the stringent application of the policy, around 1,800 people in a Beijing neighborhood were relocated to Zhangjiakou city in the nearby Hebei province for quarantine, the state-backed Beijing Daily reported.

A woman sits on the steps behind tape and a sign placed by local police to prevent people from gathering in groups at a popular local park after recent COVID-19 outbreaks in Beijing on May 16, 2022. Kevin Frayer/Getty Images

While no citywide lockdown has been imposed in the capital city’s month-long fight against COVID-19, Beijing has gradually tightened curbs. Six of the capital’s 16 districts advised residents to work from home, while a further three districts encouraged people to follow such measures, with each district responsible for implementing its own guidelines. Those who have to go to work should have a negative result on a PCR test taken within 48 hours, and must not veer outside the route of their home-to-work commute.

“The Chinese Communist Party’s approach is unbearable, as they are inhumane and without any scientific bases,” a Beijing resident who has been sealed in his home for nearly 30 days told The Epoch Times on May 21.

Analysts at Japanese bank Nomura estimate 26 Chinese cities were implementing full or partial lockdowns or other COVID measures as of May 23, accounting for 208 million people and 20.5 percent of China’s economic output. That would be down from 271 million a week  earlier, accounting for 27 percent of output.

“But to us, this is merely a respite instead of a turning point,” the analysts wrote in a note. They said passing a turning point would depend exclusively on an exit from the regime’s zero-COVID strategy, and not so much on daily case numbers and monthly activity data.

Political Choice

As the regime sticks to its expansive zero-COVID policy, global supply chains are not likely to be able to resume functioning as normal, Huang, the economic analyst, said, noting that the United States and other Western economies could continue to see headwinds.

Aditya Bhave, an analyst at Bank of America, said the lockdowns’ effect on the American economy would “become apparent” in U.S. official data released next month, according to Forbes. While he doesn’t believe it would push yearly inflation to a new peak, Bhave said it might cause a “short burst of upward pressure” on prices.

In addition to the data, an indirect indicator of the impact of the regime’s stay-at-home orders on the U.S. economy is the recent call to lower or remove U.S. tariffs on Chinese goods to reduce inflation, said professor Yen Huai-Shing, deputy director of the Taiwan Chung Hua Institution for Economic Research.

For months, senior economic officials within the Biden administration have debated whether to ease tariffs of up to 25 percent on more than $300 worth of Chinese goods imposed by former President Donald Trump as part of his administration’s efforts to combat the regime’s unfair trade practices.

“Removing tariffs could only shave an estimated 2 or 3 percent off inflation, at maximum,” said Yen.

A cargo ship loaded with containers makes its way to a port in Qingdao city, eastern Shandong Province, China, on Jan. 14, 2020. AFP via Getty Images

U.S. Trade Representative Katherine Tai said in a May 24 interview with Bloomberg Television that the United States must “keep our eye on the ball in terms of how to effectively realign the US-China trade and economic relationship.” Tai said the United States must be “strategic” on China tariffs.

The remarks came a day after President Joe Biden, on his first trip to Asia, said he is “considering” removing some Trump-era tariffs to combat inflation.

Secretary of the Treasury Janet Yellen on May 18 said that some of the tariffs imposed by Trump “aren’t very strategic” in the sense of addressing real issues such as unfair trade practices and supply chain vulnerabilities.

The Trump administration imposed tariffs based on a 2018 investigation that concluded the Chinese regime engaged in excessive government subsidies, intellectual property theft, and other unfair trade practices. In retaliation, the Chinese regime also levied tariffs on about $90 billion of U.S. imports.

The Biden administration last month officially launched a review of the U.S. tariffs on Chinese goods.

Whether to maintain Trump-era trade policies on China is a political choice and depends on the Biden administration’s awareness of threat from the Chinese Communist Party (CCP), said Frank Tian Xie, a professor of marketing at University of South Carolina Aiken.

“If he [Biden] could realize the CCP is the top and the most dangerous enemy of the United States, as well as the world, he will keep the Trump-era trade policy and even impose more taxes and export controls of technology,” said Xie. “Biden seems not very clear on this point.”

Luo Ya, Hong Ning, and Reuters contributed to the report.