Why Is China’s Recovery From Covid Shock Slow?

Case in point: German automaker Volkswagen, which has factories in two of this year’s hardest-hit regions, said Wednesday its China production sites were up and running, but Covid controls were disrupting supply chains.

The automaker said it was unable to provide a specific figure on production levels as the factories are joint ventures operated with local partners.

Although the national Covid case count has fallen over the last month, pockets of new cases ranging from Beijing to southwest China have prompted stay-home orders and mass testing. Freight volumes remain below normal.

“Many regions and cities have tightened restrictions at the first sign of local cases,” Meng Lei, China equity strategist at UBS Securities, said in a note last week.

“Our case studies of Shanghai, Jilin, Xi’an and Beijing show logistical and supply chain disruptions are the biggest pain points that affect production resumption,” Meng said. “Therefore work resumption is likely to be gradual rather than happening overnight.”

The Chinese government has stuck to its stringent policy of “dynamic zero-Covid” despite this year’s emergence of the highly transmissible omicron variant.

The “most significant impact” of the Covid resurgence is that it “interrupted” the normal policymaking schedule, said Dan Wang, Shanghai-based chief economist at Hang Seng Bank China.

She said the latest wave of cases and lockdowns really only started after the central government released its annual economic plan at the “Two Sessions” parliamentary meeting in March.

In China’s heavily managed economy, this annual meeting is a critical part of a cycle for developing and implementing national policies — across departments and regions.

Supply chain disruption and lackluster consumption are manageable, but once the policy schedule is interrupted, “it’s hard to get it back to its original track quickly,” Wang said.

There are so many different economic targets that “a lot of compromises have to be made between different [government] departments,” she said. “That has made the policy process extremely slow and lagging.”

The information office for China’s State Council, the country’s top executive body, did not immediately respond to a CNBC request for comment.

Politics holds particular weight with officials this year ahead of a regular shuffle of leaders scheduled for the fall. Chinese President Xi Jinping is expected to stay on for an unprecedented third term.

In early March at the “Two Sessions,” Beijing set targets such as GDP growth of “around 5.5%.” But that’s about 1 percentage point or more above the forecast of many investment banks — which have repeatedly slashed their China growth estimates as Covid lockdowns persist.

Wang maintains a relatively high forecast of 5.1% as she expects China to increase stimulus and ease tight Covid controls later in the summer.

But so far, nearly two months after Shanghai locked down in earnest, policymakers have yet to make major changes.

Whether in terms of interest rates or fiscal policy, the level of government stimulus is still about half of what it was during the height of the pandemic in 2020, Morgan Stanley’s Xing said.