China’s Zero-Covid Policy – What Does It Mean for the Global Economy?

 by Tareef Ahmed

(image source: China News Service)

China continues to battle the Omicron coronavirus variant but risks blocking already stretched global supply chains – Threatening the production of goods. But how does what happens in China, affect us in the UK?

The Beijing Winter Olympics is planned to start on Friday 4th February and run for 16 days until it ends on Sunday 20th February however there are concerns regarding the spread of the omicron variant. In order to reduce the risk to many athletes (and any domestic tourists), the Chinese government has imposed restrictions to maintain its zero-Covid target.

China is currently the world’s most populous country with over 1.4billion citizens, many of which now live with some form of restriction. The central city of Xi’an has been placed in lockdown for the third consecutive week forcing roughly 13million people to remain inside their homes. Many of these people now struggle to find food and have resorted to bartering goods. However, the issue with bartering is that it requires a ‘double coincidence of wants’ which means both parties would have to agree on what they value the most of between the options. A video has surfaced showing a child having to trade their Nintendo Switch console for a packet of instant noodles and two steamed buns – showing how much the family valued the food as opposed to an entertainment console.

Other areas across China such as cities in the Henan province have introduced mandatory testing alongside the closing of non-essential businesses will likely slow down the production of many goods. The capital city, Zhengzhou, is at the heart of manufacturing in China and even houses the world’s largest iPhone factory will likely suffer from these restrictions as manufacturing will either halt completely or suffer from a shortage of labour. This will affect the global economy as a whole due to the delays and shortage of supply.

For example, Zhengzhou Nissan produces over 300,000 SUVs annually (just under 10% of total output). Without these Chinese-made SUVs being produced and entering the market, there will be a shortage of SUVs being supplied to the market. On a supply and demand graph, this will result to a shift left of the Quantity of SUVs supplied. Assuming Ceteris Paribus (All other things being equal), this will lead to a price increase in the SUV market.

We have seen a great surge in used car prices with reports from Auto Trader suggesting a 30.5% rise in average used car prices year-on-year in the UK; this would be a major impact caused by the rise in prices for new cars alongside the delays in manufacturing and delivering them. This rise in used car prices has been driving inflation up across the UK as inflation has passed the 2% target the Bank of England aims for.

This shows just one of the many effects that will occur due to a decision made by the Chinese government showcasing exactly how economics is intertwined in our daily lives.