Strict COVID-19 lockdowns in China have been a headwind for the markets and are increasingly impacting supply chains. Haining Zha, Portfolio Manager at TD Asset Management, joins Kim Parlee to discuss if there are any signs of progress and what it means for global growth.
Haining, it's great to have you with us. Thanks so much for taking the time. Can you give us some context on what we're seeing with the lockdowns in Shanghai? How stringent are they? And when you compare to what happened in Wuhan, how do they compare?
- Right. I think since the Wuhan's lockdown, the current one in Shanghai is probably one of the most stringent one. So basically, the city was divided into different zones. And depending on the number of positive cases, they were assigned to different tiers. For example, there are lockdown zone, there are control zone, there are precaution zone. And for residents that live in the lockdown zone, basically means they have to stay at home. So as you can imagine, the economic activity was hugely impacted.
But going forward, I think we are less pessimistic because based on the pattern we observed from other countries, usually a COVID wave only lasts between two to three months. And Shanghai is already two months into this wave. And in the last couple of days, we already observed that the daily new confirmed cases display a clear declining trend. So hopefully the worst is behind us.
- That's good news to hear for Shanghai. What does it mean for other cities? Or do you see that overall happening?
- Right. I think recently, the cases are creeping up in Beijing as well, the capital city. And there, I expect government to also have the similar lockdowns. But the reason why is I think from government standpoint of view, I think it is, in general, too early to loosen the Zero COVID Policy. The concern is, once you have the virus on the loose, you can never take it back. It's irreversible. And given the huge population base and high percentage of senior population, even the death rate on absolute level is low, the absolute number of deaths could still be huge.
But the reason I'm less concerned about Beijing situation is that with a Zero COVID Policy you have to find out the virus early and nip it in the bud. And Beijing is learning from Shanghai's lesson and is acting very swiftly. Right now, the government is conducting several rounds of PCR tests to identify the hotspot. And one plus is earlier this year, Beijing also hosted Winter Olympics. So the emergency measure were well rehearsed and were not taken off. So I'm less worried about that.
KIM PARLEE: That's good news to hear. And we feel for the people, of course, there in terms of what they've been going through. A lot of images of it out there has been very hard to watch. Some of it. But let me ask you, the market has been pricing in what they expect these shutdowns will meet its supply chains and therefore inflation. I think they've also been pricing in the fact they haven't been excited about how the Chinese government has been stepping in with regards to support. So are things properly priced in right now?
- Yeah. Let me first address the supply chain issue. It definitely will have a huge impact on supply chain. I think earlier this year, people are still trying to recover from the supply chain disruption from last year. And last year's main bottleneck is basically the US ports. And what the Shanghai lockdown does is it created a new bottleneck at the largest port in the world.
And because of lockdown, Shanghai's port staffing is operating at 70% of the usual level. And although the throughput is not much impacted, but the bigger problem is the trucks are-- it's very hard for the trucks to ship goods to and from the port because the truck driver need to get special passes and they are subject to several rounds of PCR tests, which all added to the delay. And even if they can deliver, the cost is usually much higher.
So I think several domestic companies are already feeling the pain. They are basically living on the supply, living on the supply within the inventory. But that cannot last very long. I think this impact will propagate through the supply chain. And I think the supply chain recovery probably won't happen for the rest of the year.
- Hmm. And you were going to comment, I know, on government support. Again, people have-- the markets, I'm going to say, specifically, have not been-- I'd say, they've been disappointed, I'd say, in terms of how the Chinese government has supported.
- Right. I am expecting more support. The reason why is, for example, if you look at consumption, one of the most stable component within the GDP, is very weak right now. If you look at the March retail sales, it's actually down 3.5%. Deviating too far from the trend growth. So I do think the government will come up with more measures. So if the consumption is weak, that means the investment need to increase to plug in that hole.
But if you look at private sector, they are facing a difficult situation. What they are facing is consumer demand is weak, the input cost is high, and they are also facing a very unstable supply chain. So they don't have a lot of confidence to invest right now. That means the government-led infrastructure investment is super important. Right now, we are hearing a lot of talks, but we haven't seen any concrete plan.
And also on the monetary policy side, the PBOC is gradually leaning to the more dovish stance, which is good news. But so far, they have been cutting the reserve requirement ratio but haven't been cutting interest much. So far, it's not enough to offset and change the market sentiment. I would expect more down the road.
- Haining, I've only got about 30 seconds. I do apologize. But one of the things that has taken the heat off commodities in the past little while has been concerns about China. I mean, I think they're responsible for about half of all the commodity consumption in the world. What do you see happening there?
- Right. I think for the short term, the lockdown actually could help put a ceiling on the commodity price. Because it reduced people's travel. And some of the Industrial production is also grinding to a halt. All of which reduces commodity demand and help bridge that supply demand gap. But for the medium term, when this wave of COVID pass, most likely that China will play catch up to reach their growth target of 5.5% by this year. So that will lend some support to the commodity price.
KIM PARLEE: Hmm. Haining, always great to talk to you. Fascinating discussion. Thanks so much.
- Thanks for having me.