China's broadest Covid - 19 outbreak since the beginning of the pandemic in late 2019 is hampering tourism and spending during the peak summer holiday, prompting analysts to review their economic growth projections as risks escalate.
Authorities rushed to cancel tourist sites, restrict cultural events and close flights as the outbreak was linked to the highly infectious delta variant spreading within just two weeks to nearly half of China's 32 provinces. At least 46 cities have advised residents to refrain from traveling unless it is absolutely necessary.
Alongside recent flooding in parts of the country, latest virus controls will likely curb retail spending and economic growth in the second half of the year.
Nomura Holdings Inc. lowers its projection for third-quarter growth to 5.1% from 6.4% previously and sees 4.4% expansion in the final three months of the year, down from 5.3%. For the full year, Nomura also cut its GDP forecast to 8.2% from 8.9%.
'The extreme measures taken by the government have resulted in potentially the most stringent travel bans and lockdowns in China since the spring of 2020, said Lu Ting, Nomura's chief economist for China. Recent rainstorms and flooding - both worse than expected - necessitate a downward adjustment of the GDP growth forecast 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 the duration of the outbreak and likely stronger policy support. Natwest PLC and Bloomberg Economics Inc. may also see downside risks to their growth forecasts.
Even though China has faced sporadic virus flare-ups over the past year, they have been much smaller in scope and were contained quickly. The current outbreak closed all tourist sites in Zhangjiajie, a renowned scenic destination in central China. Other cities in Hunan, Shanxi and Jiangsu provinces also closed tourist spots.
Airlines made 9.8% less seat capacity in China this week than last week, the second drop in a row, based on data from international booking specialist OAG. Capacity now stands at 95.7% of 2019 levels. It's the first time in five weeks that carriers have offered fewer seats in the country than they did in the comparable pre-pandemic period.
Travel booking site Qunar.com Inc. said flight and hotel cancellations on 29 July surged to four times the amount seen in normal days, and customer inquiries also surged 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 this year, said Bruce Pang, Director of Macro and Strategy Research from China Renaissance Securities Hong Kong.
The current outbreak weighs on a fragile recovery in the retail sales and adds to a number of risks analysts are already seeing in the second half, including a slowdown in exports and cooling residential investment infrastructure.
Purchasing managers surveys in July show manufacturing leading the pressure in the month. And even though Caixin PMI increased sharply from a 14 month low in June - largely because a previous outbreak in southern Guangdong was brought under control - the outlook remains dim.
The gauges'suggest that the economic recovery is not on a sure footing, Wang Zhe, senior economist at Caixin Insight Group, said in a statement Tuesday. 'The economy still faces enormous downward pressure.
Beijing has been trying to push consumption into the economy to make it less dependent on old growth drivers like investment and property. That remains a key focus for authorities, with the official Chinese Securities Journal newspaper saying in a front-page commentary Wednesday that the country should expand the overseas market to stabilize growth and counter uncertainties in domestic demand.
Bloomberg Economics estimates retail sales could 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 previous projection of 12%, it said.
Authorities are already on guard for slower growth in next months and have pledged fiscal and monetary support to cushion the recovery. This year, the government has advanced GDP growth target of more than 6%.
Traders are printing higher bets for monetary easing with bond yields and an indicator of future rates at one-year lows. The rally 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, supported by domestic inflows and delays in local government bond issuance. Bonds have also been triggered by stocks demand triggered by a sell-off.
Production has been spared a nationwide lockdown of the sort that attacked the economy in early 2020. Even so, 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.
The latest outbreak has spread to Dalian despite the capital city's stringent measures, with officials taking steps Tuesday to ban rail passengers from 23 regions, including Zhengzhou, Nanjing, Yangzhou, Shenyang and Beijing. The financial hub of Shanghai also reported a virus infection 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 Southern Yunnan province in China. More than a dozen music festivals in various cities were also called off or delayed, and cinemas closed in Nanjing, Zhangjiajie and Lianyungang.
Cases have not been found in areas with heavy industrial or export operations so far, which means the impact on production should be limited, said Iris Pang, chief economist of the ING Bank NV for Greater China.
'If there are cases in new locations that are major cities of services or manufacturing, then it would affect economic activities, she said.
