China’s latest Covid-19 outbreak threatens to derail consumer recovery

BEIJING (BLOOMBERG) – China’s broadest Covid-19 outbreak since the beginning of the pandemic in late 2019 is hampering tourism and spending during the peak summer holiday, adding another risk to the economy just as consumption was picking up.

The authorities rushed to close tourist sites, call off cultural events and cancel flights, as the outbreak linked to the highly infectious Delta variant spread to nearly half of China’s 32 provinces within just two weeks. At least 46 cities have advised residents to refrain from traveling unless it is absolutely necessary, according to Chinese media reports.

“There will be some downside risks to third-quarter gross domestic product (GDP) growth, and the actual impact will depend on the length of the outbreak as well as the degree of social distancing policies,” said Natwest Group economist Liu Peiqian.

Even though China has faced sporadic virus flare-ups over the past year, they have been much smaller in scope and were contained quickly. The current outbreak has shut all tourists sites in Zhangjiajie, a renowned scenic destination in central China. Other cities in Hunan, Jiangsu and Shanxi provinces have also closed tourist locations.

Airlines scheduled 9.8 per cent less seat capacity in China this week than last week, the second drop in a row, based on data from scheduling specialist OAG. Capacity now stands at 95.7 per cent of 2019 levels. It is the first time in five weeks that carriers have offered fewer seats in the country than they did in the comparable pre-pandemic period.

The current outbreak weighs on a fragile recovery in retail sales and adds to increasing headwinds to economic growth in the second half of the year. Analysts expect a likely slowdown in exports and cooling property and infrastructure investment.

“Residents’ wage growth was already lagging, and if they can’t spend their money due to the outbreak, it will surely be a drag on consumption in the second half of the year,” said Mr Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong.

Bloomberg Economics estimates retail sales could contract about 0.2 per cent month-on-month in July and August, similar to the impact seen during outbreaks at the beginning of the year in Hebei and Jilin provinces. For the year as a whole, retail sales growth will likely fall short of a previous projection of 12 per cent, it said.

The authorities are already on guard for slower growth in coming months, and have pledged fiscal and monetary support to cushion the recovery. The government has targeted GDP growth of more than 6 per cent this year.

Bloomberg Economics’s chief Asia economist Chang Shu said: “Production has been spared a nationwide lockdown of the sort that slammed the economy in early 2020. Even so, the chances of another reserve requirement ratio cut to cushion the blow to the economy are increasing – and consumption could use a little such insurance.”

Qingdao International Beer Festival, China’s largest beer festival, was called off early, and Yunnan province in southern China cancelled the Torch Festival, a local tourist event. More than a dozen music festivals in various cities have been canceled or postponed, and cinemas were closed in Nanjing, Zhangjiajie and Lianyungang.

The latest outbreak has spread to Beijing despite the capital city’s stringent measures, with the authorities taking steps on Tuesday (Aug 3) to ban rail passengers from 23 regions, including Zhengzhou, Nanjing, Yangzhou, Shenyang and Dalian. The financial hub of Shanghai also reported a virus case this week.

Cases have not been found in areas with heavy industrial or export activities so far, which means the impact on production should be limited, said Ms Iris Pang, chief economist for Greater China at ING Bank.

“If there are cases in new locations that are major cities of services or manufacturing, then it would affect economic activities,” she said.