China is risking a big hit to the economy and supply chains with zero-Omicron approach

Hong Kong (CNN Business)The Chinese government’s unwavering insistence on stamping out any trace of the coronavirus is facing its biggest test yet as authorities grapple with Omicron’s quickening spread. And it could cost the world’s second largest economy dearly this year.The Covid-19 variant has been cropping up across China in recent days, including in major port cities like Dalian and Tianjin, prompting restrictions that could upend business operations in those places. The rest of the world is also dealing with Omicron, but China is different because of how intent authorities are on preventing any widespread outbreak by locking down cities and curbing travel.The strict approach has so far been effective: China has recorded far fewer Covid-19 cases than many other nations during the pandemic, and its economy was the only major one to grow in 2020.

Omicron, though, threatens to expose some serious flaws in that plan. The variant is much more transmissible than others, making it difficult to contain. And as the rest of the world learns to live with the virus, economists say China’s zero-tolerance strategy is likely to do more bad then good in 2022.

Goldman Sachs, for example, has just slashed its projection for Chinese economic growth in 2022 to 4.3% from 4.8%. That’s roughly half last year’s growth rate.Those revisions come “in light of the latest Covid developments — in particular, the likely higher average level of restriction (and thus economic cost) to contain the more infectious Omicron variant,” Goldman analysts wrote in a research note Tuesday.Enter your email to receive CNN’s nightcap newsletter.close dialog

We read all day so you don’t have to.Get our nightly newsletter for all the top business stories you need to know.Sign Me UpBy subscribing you agree to ourprivacy policy.Morgan Stanley is taking a similar view that Omicron could mean the costs of a zero-Covid approach outweigh the benefits. Last week its analysts forecast growth of 4.9% in the first quarter, but suspect it could slow to 4.2% “should Omicron spread to other regions and lead to multiple city-wide lockdowns.”The analysts cited a “deeper disruption to services” as a top risk for China, if the country extends containment measures to several cities. That would mark China’s most severe and widespread attempt to contain the coronavirus since April 2020, when it lifted its massive lockdown on Wuhan, the original epicenter of the virus.

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