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Are China’s COVID-19 lockdowns a greater threat to inflation?

China’s COVID-19 lockdowns are a greater risk for global inflation today than they were in 2020, Bernstein analysts said. This is because the world has become more reliant on Chinese goods since the pandemic began, the analysts said in an April 8 note. China’s share of exports globally rose to 15.4% in 2021, the highest since at least 2012.

China’s COVID-19 lockdowns

China’s exports have surged in the last two years as the country was able to control the initial Covid outbreak within weeks and resume production, while the rest of the world struggled to contain the virus. China has maintained its zero-Covid policy, while other countries have relaxed controls in the last year.

Over the last several weeks, mainland China has tackled its worst Covid wave in two years with lockdowns and travel restrictions that foreign business leaders have described as tougher than in early 2020. The stay-home orders and virus testing requirements have particularly affected coastal economic centers like Shanghai. “We believe, the macro impact of China lockdowns could be quite high and something which the market is not yet pricing in,” Bernstein’s Jay Huang and a team said in a report.

Higher Freight Rates

Compared to pre-pandemic levels, Shanghai export container costs are five times higher and air freight rates are two times higher, the report said, noting similar strains on supplier delivery time. “Hence, there would be higher export of inflation, especially to China’s large trading partners but at the same time delay China’s own demand recovery.”

Reflecting supply chain disruptions, Chinese electric car company Nio announced production halts over the weekend, with some production resuming Thursday. German automaker Volkswagen said its factories on the outskirts of Shanghai and in the northern province of Jilin remained closed through at least Thursday.

Fulfilling Majority of Overseas Demand

Bernstein’s analysis found that China manufactures the majority of overseas demand for containers, ships, rare earths and solar modules — along with the bulk of mobile phones and PCs. Chinese factories no longer only complete the final assembly for those electronic products but also manufacture components like LCD panels and integrated circuits, the report said, pointing to faster growth in 2021 in exports of those parts.

China’s first quarter trade data showed steady growth in exports. The country’s producer price index and consumer price index rose faster-than-expected in March, according to data out Monday.

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