The broadest Covid 19 outbreak in China since the beginning of the pandemic in late 2019 is hampering tourism and spending during the peak summer vacation, prompting analysts to review their economic growth projections as risks escalate.
Authorities tried to cancel tourist sites, close cultural events and close flights as the outbreak linked to highly deadly delta variant spread within two weeks to almost half of China's 32 provinces. At least 46 towns have advised residents to refrain from travelling unless it's absolutely necessary.
Alongside recent flooding in parts of the country, the latest virus controls will likely curb retail spending and economic growth in the second half of the year.
Nomura Holdings Inc. has lowered its projection for third-quarter growth from 6.4% previously and sees 4.4% expansion in the final three months of the year, down from 5.3%. Nomura cut its GDP growth forecast to 8.2% from 8.9% for the full year.
'The draconian measures taken by the government are resulting in potentially stringent travel bans and lockdowns in China since spring of 2020, said Lu Ting, Nomura's chief economist for China. "Recent rainstorms and flooding - both worse than expected - necessitate a downward adjustment to our GDP growth forecasts for the third quarter.
Goldman Sachs Group Inc. said the potential impact on third-quarter growth could be 0.7 percentage points, although it didn't lower its 6.2% growth forecast for the quarter, saying there are uncertainties about duration of outbreak and likely stronger policy support. Natwest plc and Bloomberg Economics Plc. see downside risks to their growth forecasts.
Even though China has faced sporadic virus flare-ups over the past year, they have been much less concentrated in scope and were contained quickly. The current outbreak closed all tourist-sites in Zhangjiajie, a popular scenic destination in Central China. Other cities in Hunan, Jiangsu and Shanxi provinces have closed tourist sites.
Airline OAG reported 9.8% less seat capacity in China than last week, the second drop in a row, based on data from scheduling specialist OAG. Capacity stands for a period of 95.7% in 2019 based on RBN level. It's the first time in five weeks that carriers have offered fewer seats in the nation than they did in the comparable pre-pandemic period.
Travel booking website Qunar.com Inc. said flight and hotel cancellations on July 29 surged to four times the amount shown in normal days, and customer inquiries also soared to three times the usual amount
'Residents' wage growth was already lagging and if they can't spend their money due to the outbreak, it will surely be a drag on consumption in the second half of the year, said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong.
The current outbreak weighs on a fragile recovery in retail sales and adds to a number of risks that analysts are already seeing in the second half, including a slowdown in exports and cooling property investment.
Purchasing managers surveys show that the manufacturing plants are coming under pressure this month. If the Caixin Service PMI rebounds sharply from a 14 month low in June - largely because a previous outbreak was brought under control in the southern province of Guangdong, the outlook remains dim.
The Gauages'suggest that the economic recovery is not on a sure footing, Wang Zhe, senior economist at Caixin Insight Group, said in a statement Wednesday. A majority of the economies facing an enormous downward pressure are also under their current economic conditions.
Beijing has been trying to spur consumption in the economy to make it less reliant on old growth drivers like investment and property. That remains a key focus for authorities, with the official China Securities Journal saying in a front-page commentary Wednesday that the country should expand the domestic market to stabilize growth and counter uncertainties in overseas demand.
Bloomberg Economics estimates retail sales would contract about 0.2% month on month in July and August, similar to the impact seen during outbreaks at the beginning of the year in Hebei and Jilin provinces. For the year as a whole, retail sales growth will likely fall short of a previous projection of 12%, it said.
Authorities are already on guard for slower growth in coming months and have pledged fiscal and monetary support to cushion the recovery. In the new year of GDP growth the government has targeted growing over 6%.
Traders are boosting bets for monetary easing, with bonds yields and an indicator of future rates at one-year lows. Tuesday's rise in sovereign debt follows seven consecutive weeks of gains, the longest winning streak since the trade war with the U.S. broke out in 2018.
The benchmark 10 - year yield has fallen nearly 45 basis points from its February high in the future, boosted by local inflows and a delay in foreign government bond issuance. Bonds have also been triggered by haven demand triggered by a sell-off in stocks.
Production has been spared a nationwide lockdown of the sort that slammed the economy in early 2020. Despite this, the chances of another reserve requirement ratio cut to cushion the blow to the economy are increasing - and consumption could use a little such insurance in good terms.
The latest outbreak has spread to Beijing despite strict measures by authorities Tuesday to ban rail passengers from 23 regions, including Zhengzhou, Nanjing, Yangzhou, Shenyang and Dalian. This week, the financial hub of Shanghai reported another virus case this week.
Several tourist events have been postponed or cancelled, including the Qingdao International Beer Festival, China's largest beer festival, and the Torch Festival in Yunnan province in southern China. More than a dozen music festivals in various cities have also been called off or delayed, and cinemas were closed in Nanjing, Zhangjiajie and Lianyungang.
Cases haven't been found in areas with heavy industrial or export activities so far, which means the impact on production should be limited, said Iris Pang.
'If there are cases in major locations that are new cities of services or manufacturing, then it would affect economic activities, she said.