China Economy

China's zero-Covid policy could deal another blow to global supply chains, Moody's says

Key Points
  • Supply chain disruptions are being prolonged driven largely by China's strict zero-Covid policy, according to an economist from Moody's Analytics.
  • China's zero-Covid policy "really does increase the downside risks for material improvement in supply chains," said Katrina Ell, a senior economist for Asia-Pacific.
  • She noted there will be "important ramifications for inflation and also central bank policy-making in the next couple of months."
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China's zero-Covid policy is threatening recovery of supply chains: Moody's

Supply chain disruptions are being prolonged driven largely by China's strict zero-Covid policy, according to an economist from Moody's Analytics.

The bottlenecks have lasted for about a year now but are expected to "materially ease in the early months of this year," said Katrina Ell, a senior economist for Asia-Pacific at Moody's Analytics.

"So we would start to see material downward pressure on things like producer prices, input prices that kind of thing. But given China's zero-Covid policy and how they tend to shut down important ports and factories — that really increases disruption," she told CNBC's "Squawk Box Asia" on Friday, adding it amplifies ongoing supply chain pressures.

Beijing has imposed a strict zero-Covid policy since the pandemic began in early 2020. It entails strict quarantines and travel restrictions — whether within a city or with other countries — to control outbreaks. 

Restrictions aimed at containing Covid-19 have impacted manufacturing and shipping operations globally, exacerbating the supply chain crisis. There have been renewed concerns that the highly infections omicron variant could also deal another blow to the shipping industry.

China's zero-Covid policy "really does increase the downside risks for material improvement in supply chains," Ell noted, saying there will be "important ramifications for inflation and also central bank policy-making in the next couple of months."

This is especially true given Beijing's economic weight and importance on the global stage.

China, the world's second largest economy, last year shut down a key terminal at its Ningbo-Zhoushan port — the third busiest port in the world. It came after one worker was found to be infected by Covid, and was the second time the country suspended operations at one of its key ports.

On Tuesday, Goldman Sachs cut its 2022 forecast for China's economic growth to 4.3%, down from 4.8% previously. The U.S. investment bank's analysis was based on expectations that China may increase restrictions on business activity to contain the said omicron variant.

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China's zero-Covid lockdowns could reignite global supply chain delays, says UBS

"The zero-Covid policy means that the economic recovery is a bit more bumpy, particularly on the consumption side of things," noted Ell. She added this includes monetary policy moves such as ongoing liquidity injections and potential rate cuts.

"There's a number of levers that had already being utilized that will continue to be utilized in coming months to smoothen the domestic demand," she noted. "And also to ensure that the challenges that China's economy is facing don't overwhelm the government's objective to see stable growth this year."  

 — CNBC's Weizhen Tan and Evelyn Cheng contributed to this report.