Inflation: When Will China’s Lockdowns End?

International | Jun 15 2022

China’s recent lockdowns, coinciding as they do with the Ukraine War, are contributing to inflation in developed markets, but is this just the beginning of the China inflation story?

-Supply chain inflation wreaking havoc
-Is China really the bogeyman?
-China’s deflationary power a huge lever
-When will China’s lockdowns end?
-US Federal Reserve sharpens inflation knife
-ESG Short-Term Inflation Villain, Long-Term Saviour
-Technology holds the key

By Sarah Mills

Supply chain inflation has been dogging economies around the world, the United States last week announcing an eye-watering 8.6% annual rise in its May consumer price index (CPI), a 40-year high.

Covid was the primary culprit. The pandemic provided an excuse to unleash massive stimulus around the world; while lockdowns triggered supply disruptions to both manufacturing supply chains and labour markets, and a shift in western consumption patterns from services to goods.

The Ukraine War was another turn of the screw, sending energy prices and certain other commodities prices soaring.

Throw in demand for green commodities into the mix and we have our current dilemma.

Many are also pointing the finger at China, claiming that its lockdown policy is exacerbating inflation and that the policy is unnecessary given the new weaker covid variants do not justify such drastic action.

Others beg to differ.

Quick Backgrounder On China’s Role In Inflation

But first, it is important to note the major role China has played as a brake on inflation over the past few decades.

The western quest to outsource manufacturing to countries with cheaper labour, while simultaneously reducing the appeal of communism to poorer countries, found its Holy Grail in China.

The mobilisation of western capital through China’s centralised command and control economy acted not just as an inflationary brake but an important lever to global growth, spurring global demand as cheap goods flooded the world.

But China now accounts for roughly 35% of global manufacturing output but only 10% of global household consumption.

The unwinding of this disparity, as China seeks to raise its social scores in an ESG world, is likely to create massive ructions in global economies.

“Structurally, China’s role as a global disinflationary force is waning,” posits Morgan Stanley, as the potential to further depress western wages narrows.

Much of China’s rise, global growth and low inflation during the past three decades can also be traced to the unbridled rape of the environment, another trend which is forecast to reverse according to the ESG narrative (although there are few real signs of a significant reversal at this stage).

Morgan Stanley notes the green transition means the cost to the environment will now have to be accounted for, and this will increase the costs of China’s manufacturing. 

These structural shifts are likely to have such dramatic impacts on global economies that it makes monetary policy solutions to modern problems appear archaic and more of a distraction than a panacea. 

Short-Term Impact Of China On Inflation

Morgan Stanley notes that since the pandemic started (outside of the most recent lockdowns), China has been a major contributor to ameliorating the cyclical global inflation, managing to maintain supply of goods to the world for most of the two years of the pandemic.

China's exports grew by an average of 25% annually after covid’s initial onset, notes Morgan Stanley, relieving demand pressures while simultaneously allowing the country to increase its share of global export markets. 

Many observers point out that this was not entirely altruistic, as it helped deepen China’s grip on global supply chains, just as geopolitical and ESG imprimaturs were pushing towards onshoring, and as Russia invaded Ukraine.

But that still leaves the most recent lockdowns, which coincided with the Ukraine War.

These have contributed to rising inflation within supply chains over the past six months, and, while the picture is far from black and white, most market observers pray for their swift end. 

When Will China’s Lockdowns End?

Morgan Stanley notes that China’s exports rebounded in May and expects supply chains will start to normalise by end June or early July, as well as a normalisation in western patterns of consumption away from goods and back to services.

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