How China’s zero-COVID policy threatens the US economy

Historic protests across China over its zero-contagion policy for COVID-19 hit U.S. stocks on Monday, underscoring the close link between China’s controversial measures and domestic economic conditions that could help determine whether the U.S. slips into recession.

Residents in isolation in some regions say they have been left without enough food or medical care. Meanwhile, protests flared after Thursday’s fire at an apartment building in the northwestern city of Urumqi, which killed at least 10 people, as some claimed blockades had prevented victims from being rescued, while government officials denied any such impact.

The tension over the shutdown of work due to COVID in the world’s second largest economy coincides with the uncertain economic outlook of the US.

An aggressive series of interest rate hikes by the Federal Reserve aims to reduce skyrocketing inflation by slowing the economy and reducing demand. But such an approach risks plunging the country into crisis and leaving millions without work. In addition, ongoing disruptions from the Russia-Ukraine war have exposed vulnerabilities in economies around the world, including the U.S., experts say.

The shutdowns due to COVID in China have clogged supply chains in a robust manufacturing industry, prolonging pandemic-era bottlenecks that contributed to inflation, analysts told ABC News. Meanwhile, the zero-COVID policy has stagnated China’s economy, hurt spending among Chinese shoppers and in turn hit American companies that depend on it, they said.

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“When consumers are locked up in these different cities, it’s a gut punch to the American economy,” Dan Ives, director of equity research at investment firm Wedbush, told ABC News. “There has been a fork in the road.”

Here’s what you need to know about how China’s zero-covid policy is increasing the risk of a US recession:

Zero-COVID policy contributes to US inflation

A key threat to US economic performance is inflation, which remains very high and is partly a result of Chinese quarantines.

The staggering price hikes stem from the pandemic, when millions around the world, faced with isolation, have swapped restaurant spending for couches and exercise bikes. But the surge in demand for goods has far outstripped supply as COVID-related bottlenecks have slowed delivery times. When demand exceeded supply, prices skyrocketed.

Some supply bottlenecks have eased, but others remain, including China’s zero-sum fight against COVID policy and associated blockades.

“The main effect of China’s zero-tolerance policy is to disrupt some supply chains,” David Dollar, a senior fellow at the Brookings Institution focused on US-China economic relations, told ABC News.

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“We still import a lot from China and these problems in the supply chains mean that the products are not here and that contributes a little to the inflationary pressure,” he added.

For example, China’s zero-covid policy has led to major iPhone shortages ahead of the holidays, according to a report released by Ives on Monday. Shortages have reached as high as 35% of typical holiday inventory at some stores, causing overall demand for iPhones to outstrip supply by a 3-to-1 ratio, he found.

The iPhone shortage is the “poster child” of a larger trend, Ives told ABC News. The zero-COVID policy continues to reduce the supply of goods from China by an estimated 10% to 20%, he said.

To be fair, analysts disagree on the extent to which supply shortages have contributed to inflation, as opposed to the deluge of stimulus payments that have boosted demand. “There’s definitely some link, but I wouldn’t overstate it,” Dollar said.

PHOTO: The Apple Inc logo is seen at the entrance to the Apple store in Brussels on November 28, 2022.

The Apple Inc logo is seen at the entrance to an Apple store in Brussels, November 28, 2022.

Yves Herman/Reuters

Zero-COVID policy hurts Chinese consumers and American businesses

In addition to suffocating supply, China’s blockades have suppressed domestic consumer demand, causing a slowdown in U.S. companies that do a significant portion of their business in China.

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Holiday spending during the weeklong National Day holiday last month fell 56% compared to pre-pandemic levels, Bloomberg reported. Overall, China’s gross domestic product rose 3.9% in the three months to September, well below the 4.9% growth recorded in the same period last year.

“People are cooped up at home a lot of the time, so they’re not spending money outside,” said Dollar of the Brookings Institution.

“If China grows well, it would import more from the US and contribute to the profits of American companies operating there,” he added. “All that is not happening this year.”

Weak consumer demand in China contributed to Monday’s market sell-off in response to civil unrest over the zero-sum policy against COVID, Dollar said.

As of Monday afternoon, Apple shares are down nearly 3%.

“Many large American companies listed in New York have serious business in China,” he said. “If there is civil and political unrest, if the Chinese economy slows down, that creates uncertainty for many American companies.”

“The market hates uncertainty.”

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