/Report: China lockdown could cause more inflation in the world
Report: China lockdown could cause more inflation in the world

Report: China lockdown could cause more inflation in the world

The largest wave of Covid-19 recorded in China since 2020 continues to spread in that country despite extreme containment measures. According to a recent report by Bernstein, quoted on CNBC, the ongoing lockdowns threaten more inflation around the world.

The financial advisory firm expresses that the threat of inflation is much greater than that seen in 2020. With this they imply that the CPI worldwide and in the United States in particular will continue to grow. The latter, despite the fact that it was expected to be approaching its ceiling.

This Tuesday it was known that inflation in the North American country reached 8.5%, the highest in 40 years. If the problem persists in China, that index could be much higher and would probably sentence the world’s main economies to recession.

Analysts believe there will be more inflation

According to analyst Jay Huang and the team that wrote the report , the threat of more inflation rests on the dependence on Chinese goods. While the world was fighting the virus and the international industry was in trouble, Beijing managed to cut the chain of contagion in time.

This allowed the nation to continue working and a large part of the world economy depended on it. Despite the bottlenecks in the commercial chain, the exports of that nation became a critical piece for the recovery.

In this sense, the hopes in the recovery were placed on China’s industrial and commercial potential. In the midst of this, hostilities broke out between Russia and Ukraine, which was made worse by the violent outbreak of virus infections.

In this way, the main commercial cities, the ports and the most important industrial nerves are partially or totally paralyzed. The lack of technological products, components and dozens of merchandise could cause a new global escalation of prices, which would be expressed in inflation rates.

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The struggle of the authorities to contain the virus

The discipline that allowed the Chinese population Successfully getting through the worst of the global pandemic in 2020 and 2021 seems to be running out of steam. According to reports, the city of Shanghai, which reaches its third week of confinement, is showing signs of discontent. The BBC portal speaks of alleged clashes between security forces and citizens.

The authorities imposed extreme measures, with which leaving the house is prohibited under rigid threats. At the same time, they run an aggressive regimen of testing and anyone who tests positive for the virus is placed in quarantine. However, analysts fear that the situation could soon get out of control due to the 20,000 daily infections.

In this context, it is very likely that Chinese trade will continue at low levels and increasing the possibility of more inflation in the world. Criticism of the authorities is based on the fact that the number of serious cases is very low, which would make the measures unnecessary. Despite this, in Beijing they seem to take the fight against the virus as a real challenge.

While this is happening, the internal economy continues in a maze of dangers and sends serious alarms to the rest of the countries. International companies stationed within that country were also forced to close their doors, which increases the problem to a greater extent.

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The authorities of the People’s Republic of China are desperately fighting to curb the spread in Shanghai and other major cities. According to reports, the number of infections amounts to 20,000 daily, but the rate of serious cases is considerably low. Picture: BBC

Inflation in the United States would no longer be at its ceiling

Last Tuesday, the report of the US Bureau of Labor Statistics was published. According to its data, the CPI in that country rose from 7.9% in February to 8.5% in March. Although this is a higher rise than expected by Wall Street (8.4%), there was hope that the Fed’s measures could control it during the course of the year.

The central bank began the process of raising interest rates last month. Likewise, it announced that the rate increases would be made in stages during the remaining six FOMC meetings this year. In addition, additional increases were not ruled out in the event that the inflation rate continued to rise threateningly.

With the problem described in China plus the imbalance in the hydrocarbon market, the authorities they fear that inflation cannot be controlled. In that case, sharper increases in interest rates could be expected. However, this leads to a serious problem related to employment, trade and even important industrial sectors.

In other words, the increase in interest rates could lead to the world’s leading economy into recession. Recently, the first signs were given with the inversion of the yield curve of the 2 and 10-year bonds. Historically, this is a clear signal that a recession is on the way.

The Inflation in the United States remains on a steep rise and its level is the highest in the last 40 years. Last Tuesday the report for the month of March was released, in which the IPC rose to 8.5%. Picture: BBC

Inflation export

Analysts at Bernstein affirm that the international dependence on trade generated from China is at its peak. China’s share of international exports would have grown by more than 15.4% in 2021 alone. The report ensures that this is the largest growth in its share since 2012.

“There would be a greater export of inflation, especially to China’s large trading partners”

The growth of such participation would be subject to the for the previous two years, the country would have had no problems with the virus. After the first wave of infections, the control period was a few weeks, while in the rest of the world it lasted until the end of 2021 when the measures were relaxed. But this situation was reversed a few weeks ago with the new outbreaks of infections.

Consequently, the absence of the main supplier of products translates into more inflation, according to the report. “We believe that the macro impact of the lockdowns in China could be quite high and something that the market was not evaluating until now”, underline the analysts of Bernstein.

To get an idea of ​​how problematic the situation, the report highlights that compared to the years before the pandemic, container export costs from Shanghai are now five times more expensive. “Therefore, there would be a higher export of inflation, especially to China’s large trading partners

. At the same time, China’s own recovery in demand would be delayed”.

Sectors taking the biggest hit

The report also mentions the sectors bearing the brunt of this disruption of economic life. One of them is the electric car industry. This sector has already been dragging a huge trade deficit due to rapidly growing demand and limited supply for many reasons.

In any case, Some important companies, such as the manufacturers NIO and the American Tesla, closed their doors in China in whole or in part. The same can be said for companies that manufacture semiconductors. It should be noted that these are indispensable components not only for the automotive industry, but for almost all technological branches.

In the United States, the prices of used electric cars are on the rise and with the Chinese problem, the role of that market in inflation could be greater. On the other hand, the drop in trade in components such as cells for electric vehicle batteries stands out, which have their main market in China.

According to CNBC, some plants in Japan and South Korea they are in great trouble due to lack of components to operate. As far as the export of raw materials indispensable to industry is concerned, the same applies. For example, the confinement affects the prices of palladium and other critical materials for the international technology industry.

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The war in Ukraine seems to have no end in sight

The other problem is the war in Eastern Europe. The two countries involved in the war seem unwilling to negotiate a ceasefire, which is severely punishing the hydrocarbon market. To this are added the unilateral sanctions of the West against Russia.

Although these sanctions are causing damage important to the economy of the Eurasian country, some of them are collective. In other words, they hurt the European and US economy in a particularly strong way. Meanwhile, the war ensures that oil prices remain high.

As a direct result of the price of crude, the price of fuel increases, which keeps at bay the possibilities of lower inflation.

At the same time, in China, some hope seems to be on the way. According to local media, quoted by the BBC, the authorities are sending aid teams to reactivate almost 700 companies related to chip and car technology.

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