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  • Rovindu Ambagolla

Monday Market Musings >>> China's Recovery Loses Steam

Updated: Aug 16, 2021

Before the new , more contagious, Delta variant outbreak, China was on its way to achieve a 5.8% increase in growth in the third quarter. However recent studies by Goldman Sachs shows that this projection due to prophylactic measures that had to be introduced to combat the new Delta variant, has dropped to just 2.3%.

The new Delta variant of the ongoing Corona virus outbreak has forced Chinese officials to take drastic action to curb its spread. The Delta variant started and swept across China in late July and as of now there are more than 1000 confirmed cases spread across half of its 34 provinces.

Even though these numbers are not alarming in contrast to the outbreaks we have seen in America or Europe, China has taken stern action and revised its “Zero-Covid” strategy. China has cancelled flights, closed down cities and rolled out mass testing to combat the spread of the new variant.

In addition to these measures, the third largest container port Ningbo-Zhoushan had to close its Meishan terminal as a dock worker tested positive for Covid-19. This was a significant setback as the Meishan terminal accounts for almost a fifth of the ports volume.

Senior analyst Nick Marro commented on the situation “The global trade and logistics environment is already in a pretty fragile state, interruptions to trade not only pose problems for shipping and consumers, but also for manufactures who rely on critical imported components.”

Furthermore, China is also facing difficulties in growing inflation and debt risks. The producer price index, which highlights the costs of goods sold to businesses, has risen by 9% and matches the highest levels seen in 13 years. This increase in price for raw materials have caused company profits to shrink and force them to control costs by downsizing production.

Debt risk is also a major concern, Chinas corporate bond defaults have risen to almost 9.7 billion dollars in just the first half of 2021, which according to Fitch Ratings, is the highest level for the same period on record.

Analyst at JP Morgan forecast that the GDP growth will fall from the initial 9.1% to 8.9% commenting “We expect the situation can be brought under control in the next several weeks, but the epidemic control procedure will dent consumption and services tentatively”. China's struggle to contain the spread of the virus whilst simultaneously keeping its economy active, displays the delicate equilibrium that exists between the two and shows how neither variable can be neglected.

Published August 16th | 12.03PM

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