Global economy braces for China inflation shock

COVID-19 outbreak in Shanghai
A worker in a protective suit keeps watch next to barricades set around a sealed-off area, during a lockdown to curb the spread of the coronavirus disease (COVID-19) in Shanghai, China April 11, 2022. REUTERS/Aly Song TPX IMAGES OF THE DAY - RC2YKT9UITF1

HONG KONG, April 14 (Reuters Breakingviews) - China’s battle against Covid-19 is set to deliver the world economy another blow on top of the war in Ukraine. Chinese manufacturing hubs are seizing up as authorities stamp out fresh outbreaks. Despite talk about diversifying supply chains, the world's dependence on Chinese factories has only increased.

Roughly three-quarters of China's top 100 cities - accounting for over half of national GDP - have implemented varying degrees of pandemic restrictions as of April 6, according to research firm Gavekal. Most of Shanghai's 26 million residents were confined to their homes for over two weeks, which has shuttered warehouses and curbed access to the world's busiest container port; iPhone supplier Pegatron (4938.TW) has halted production at two of its nearby plants. Extreme measures were also deployed in March across Jilin province, a vital corn producer and home to Toyota (7203.T) and Volkswagen (VOWG_p.DE) factories. Export powerhouse Guangdong is bracing for another hit, restricting travel, closing schools and rolling out mass testing.

The plan is to completely suppress contagion at whatever the cost. Draconian lockdowns enabled China to quickly restart factories after the early outbreak in 2020, but the Omicron variant is more contagious.

The economic toll will be felt beyond China's borders. Disruptions resulting from the trade war with the United States and then the pandemic saw many governments and executives talk up plans to hedge their dependence on Chinese suppliers; World Bank chief David Malpass recently argued that diversification would “probably be good for everyone”. read more That hasn’t changed much on the ground. China's share of world exports climbed to 15.4% last year, surpassing pre-pandemic levels of 13.1% in 2019, Bernstein analysts estimate.

Prolonged disruptions in the world's factory will likely stoke rising prices worldwide. Inflation in the United States is at a 40-year high read more while Euro zone prices rose to a record 7.5% in March. Surging energy and raw material costs are also to blame for the higher-than-expected increases in China's factory-gate and consumer prices in March read more .

The lockdowns have already hit trade. The European Chamber of Commerce in China said on April 7 that its members reckon Shanghai port volumes were down 40% week-on-week; shipping giant Maersk (MAERSKb.CO) has warned of congested container terminals, trucking shortages, and reduced air freight. Beijing's refusal to live with the virus could mean higher prices for everyone.

Chinese inflation could aggravate global woes

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- China's March producer price index increased 8.3% from a year earlier, official data from the National Bureau of Statistics showed on April 11. That surpassed the 7.9% increase forecasted in a Reuters poll.

- Consumer prices for March rose 1.5% year-on-year, compared to 0.9% in February.

Editing by Pete Sweeney and Katrina Hamlin

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Robyn Mak joined Reuters Breakingviews in 2013. Previously, she was a Research Associate for the Global Policy Programs at the Asia Society in New York where she focused on US-Iran relations, US-Myanmar relations and sustainability issues in Asia. She has also worked as a researcher at the Carnegie Endowment for International Peace in Washington DC and interned at several consulting firms, including the Albright Stonebridge Group. She holds a masters degree in international economics and international relations from the Johns Hopkins School of Advanced International Studies and is a magna cum laude graduate of New York University.