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What protests in China may mean for the economy

New York CNN Business —
Protests against China’s prolonged and restrictive Covid regulations spread across the country over the weekend. The demonstrations against Chinese President Xi Jinping and his costly zero-Covid policy are an exceedingly rare case of widespread civil disobedience.
While the protests represent an unprecedented challenge for Xi, they also carry economic and market implications. Oil plunged and hit 2022 lows on Monday, while shares of companies that rely on China for production felt the heat. Apple fell by 2.6% following reports that unrest at one of its factories could result in 6 million fewer iPhone Pros this year.
What’s happening: China’s controversial zero-Covid policy has affected everyday life and weighed heavily on the economy. When outbreaks get bad enough, entire cities are closed: Shanghai was shut down for about two months this spring and Chengdu, a city of 21 million people, was locked down in the fall.
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Earlier this month, Beijing eased some Covid-related restrictions, sparking hopes that the economy could soon fully reopen, but local governments once again tightened controls as cases surged. The policy doesn’t seem to be working, as cases hit record highs, but China’s low vaccination rate, relatively ineffective vaccines and aging population mean the alternative could be very deadly.
The mounting political tension has also been difficult to interpret. The protests at first seemed focused on Covid restrictions, but now appear to carry broader demands for political reform: The blank sheets of paper held up by demonstrators in Shanghai, the country’s financial hub, have already become iconic symbols of defiance against a government that limits free speech.
Economic impact: People under lockdowns say they struggle to find food and other necessities. Economic growth has slumped and unemployment has been been rising as a consequence of the lockdowns.
The policy has also led to major global production constraints that are sustaining inflation. Global supply chain pressures increased moderately in October after five consecutive months of easing, largely due to increases in Asian delivery times, according to the Federal Reserve Bank of New York’s Global Supply Chain Pressure Index.
However, commodities slid on China concerns Monday. Oil prices dropped sharply, with investors concerned that surging Covid cases and protests in China may sap demand from one of the world’s largest oil consumers.
What’s next: Chinese government officials are in a strange spot. They don’t want to end their covid policy but they also want to ensure that the political unrest doesn’t grow. Companies that do business in China are watching closely for any clues about what the future may hold. They’re also considering moving production away from the country in the long term — Apple has already shifted some of its manufacturing to India.
Goldman Sachs, in a research report published late on Sunday, predicted that protests could lead China to scrap its zero-Covid policy earlier than previously expected, with “some chance of a forced and disorderly exit.”
But the next few days could be pivotal. If protests flare up again, the Chinese government will likely be forced to react in some way. On Tuesday, it announced an “action plan” to boost vaccination rates among the elderly. But “with a rapid spread of new COVID cases, it’s hard to envision a broad lifting of restrictions that would boost the country’s economic outlook for next year significantly,” said Christopher Smart, chief global strategist at Baring. “In any case, the continuing uncertainty of pandemic policy will lead to further pressures on global supply chains and keep prices higher than they would otherwise be.”

Nov 30, 2022 13:26
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