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A resurgence in lockdowns across China has slowed economic growth across the country.

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China has adopted a new approach to contain the spread of Covid-19. Known as the zero-Covid strategy, the world’s second-largest economy has shown little tolerance for rising Covid cases and resorted to locking down large geographical areas in order to prevent the spread of the virus.

Although this strategy was successful for most of the pandemic, with the country largely untouched by previous waves, the increased transmissibility of Omicron proved to be its most formidable adversary.

In recent weeks, many cities, including Shanghai, the country’s largest city and home to the world’s busiest container port, have been under strict lockdown after cases began to rise exponentially. end of March.

This of course had a significant impact on the Chinese economy and we are starting to see the economic impact of this strategy in the data. For example, data on industrial production and retail sales, released earlier this week, came in well below expectations, down -2.9% and -11.1%, respectively.

Credit growth in China also saw a significant slowdown in April due to weaker demand, leading many economists to expect the People’s Bank of China (PBOC) to step in and provide support. monetary.

However, this support has so far proved elusive, with no policy rate changes announced to date.

That said, other measures have been taken in an attempt to stimulate the economy, with the PBOC guiding banks to lower interest rates for first-time buyers by 20 basis points.

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Housing, of course, plays a vital role in China’s economy, but it has been in recession since late last year after Chinese authorities began cracking down on heavily indebted property developers.

So while the lower cost of borrowing should help stimulate demand, it is unlikely to have a significant impact as long as containment measures are in place.

After seeing a sharp drop in the number of cases, Shanghai has started taking steps to reopen by allowing some businesses to resume operations, but things may not return to normal until mid-late June according to the deputy major. from the city. The hope is that the declines recorded this month will also start to unwind as lockdowns are eased, but China’s National Bureau of Statistics has warned that Covid outbreaks will have a big impact on the economy, although of short time.

The Chinese experience highlights the importance of the difference in interest rate policy between the two largest economies in the world: the United States and China. With the embrace of global trade that most countries in the world have pursued over the past 20 years and the coordinated global growth that has resulted, it will be interesting to see how long the stark difference in interest rate policy will last. interest between the Americans and the Chinese will last.

Mike Candeloro, Senior Portfolio Manager and Wealth Advisor at RBC Dominion Securities and Head of the Mike Candeloro Wealth Management Group provided this article. RBC Dominion Securities Inc. and Royal Bank of Canada are separate corporate entities that are affiliated. FCPE member. Mike can be reached at www.michaelcandeloro.com or message him at [email protected] or on LinkedIn.