China’s Li issues third growth warning as Covid takes toll

China’s Premier Li Keqiang issued a third warning about economic growth risks in less than a week, suggesting heightened concern about the outlook as widespread Covid lockdowns disrupt production and spending.

Authorities should “add a sense of urgency” when implementing existing policies, Li told local authorities at a seminar Monday. China will study and adopt stronger economic policies as needed to support the economy, he said.

The comments come days after similar warnings from Li, highlighting the toll the economy is taking from lockdowns and other virus control measures imposed to curb the latest wave of omicron outbreaks. Nomura Holdings Inc. said the risk is rising the economy may contract in the second quarter if lockdowns are extended after April. 

The Nomura economists estimate that about 373 million people in 45 cities are now under full or partial lockdown, making up 40% of China’s gross domestic product. With the central government making Covid containment a top policy priority, local politicians have an incentive to stick with strict controls ahead of a key leadership meeting later this year, they said.

“Global markets may still underestimate the impact because much attention remains focused on the Russian-Ukraine conflict and US Federal Reserve rate hikes,” Lu Ting, Nomura’s chief China economist, and colleagues wrote in a Monday note. 

Chinese stocks slumped on Monday as Shanghai reported record virus cases. China’s CSI 300 Index gained as much as 1.7% in afternoon trading as net buying by foreign investors reached nearly 6.8 billion yuan as of 1:55 p.m. local time, more than recouping the outflow the previous day.

Li said Monday that pro-growth measures should be brought forward and accelerated, including tax and fee cuts, sales and usage of special bonds, and incentives to keep jobs.

Local governments should tap their own policy potential to tailor targeted supportive measures according to local conditions, he said. In the meantime, they should prevent introducing and correct policies that are unfavorable to market expectations. 

The majority of Shanghai’s 25 million residents are still subject to tight movement restrictions after the municipal government announced some easing. The southern metropolis of Guangzhou is implementing a series of restrictions after local authorities warned the 20 cases they found last week could be the tip of the iceberg. 

The lockdowns will have ripple effects on growth across the region and are putting global supply chains under strain. Congestion at China’s ports has worsened after Shanghai, where the country’s biggest port is located, imposed a citywide shutdown. Ship-owners have been desperately trying to divert ships to other ports in the country to avoid a shortage of trucks and warehouse closures in Shanghai. 

There are already signs that restrictions last month weighed on the world’s second-largest economy. A private survey of factory activity in March fell to its worst level since the onset of the pandemic two years ago, and other data has shown a massive knock to the services sector, too. 

A slump in home sales has deepened, car sales slid 10.9% year-on-year last month, and domestic sales of excavators, a leading indicator for construction, plunged almost 64%. Foreign businesses in China have said the country’s Covid Zero strategy is causing major disruptions to their supply chains, with a European trade group recently calling on the government to revise its strict controls to better protect economic growth. 

The poor outlook and strict adherence to a no-tolerance strategy has prompted some economists to cut their economic growth forecasts for the year to well below the government’s target of around 5.5 percent. 

Many expect the central bank to lower its key policy interest rates for a second time on Friday, and possibly reduce the reserve requirement ratio this quarter. On the fiscal side, local governments are speeding up bond sales to fund infrastructure investment.

Even so, Morgan Stanley economists said recently the country’s “all-out easing efforts would still be blunted by successive Covid outbreaks and related shutdowns.”

“Supply chain stress is likely to worsen across Asia in coming months, even as some costs start to come off the boil. Longer delivery times indicate worse to come for supply chains as China’s Covid-19 lockdowns—especially in Shanghai —drag on,” said Chang Shu, Bloomberg chief Asia economist. 

Li said that in the face of poor logistics due to Covid control measures, localities should attach great importance to its impact on the economy. Different places should strengthen inter-regional and inter-departmental coordination to ensure smooth international and domestic logistics, and maintain the stability of industrial and supply chains, he said.

The premier also urged the country to do a good job in spring planting of grains to ensure a harvest this year, which he says is the foundation for stabilizing prices. 

Li told business leaders on April 7 that policy measures to stabilize growth should be strengthened. A day earlier, he chaired a State Council meeting which vowed to step up monetary policy action at an “appropriate time.” Bloomberg News

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