Almost 80% of the Chinese economy has been affected in some way by the worst outbreak of Covid-19 in two years, straining the supply of commodities and posing an increasing threat to demand.

China’s restrictions to contain the fast-spreading omicron variant have primarily hit travel over both short and long-distances, which is a direct drag on fuel consumption and a complication for supply chains.

The longer that Beijing persists with its Covid Zero policy, the greater the impact will be on the consumption of commodities as purchases are deferred -- think copper for electronic goods or steel for cars. Production is also at risk as inventories of raw materials dwindle and workers stay at home.

Widespread outages at metals processors, for example, could further lift markets that have already hit record highs in recent weeks because of the war in Ukraine. That would set the inflation-hawks at the central bank and economic planning agency on edge. Still, demand is also likely to shrink at some point, which would leave the net impact on prices uncertain.

Eoin Treacy's view

The coronavirus might be a medical issue, but pandemics are political. That is truer for China than most countries. They were the first country to experience it and adopted one of the most stringent quarantine regimes. That successfully contained the infection rate. Factories and ports remained open in 2020 because the problem was contained to Wuhan and the surrounding area.

That successful movement through the first iteration of the pandemic bolstered confidence in the ability of the government to deal with challenges. It has also informed the reaction to the pandemic since. 2022 is a big year in the Communist Party’s calendar. It is very unlikely they are going to announces substantial policy changes before the leadership question is well and truly settled.

Today’s infections are popping up all over the country and the omicron/deltacron variants are much more transmissible. China avoided the scale of money printing adopted by the developed world because exports boomed, and domestic demand fell. The threat to a large domestic population with little defense against these variants represents a significant speedbump for the economy. Several large factories, not least Apple manufacturers, have been forced to close. The property market is struggling, the tech sector is under pressure and domestic demand is falling.

That’s a recipe for stimulus. The longer China waits to step on the accelerator, the greater the amount they will need to create as challenges mount. The renminbi is only beginning to ease.

The Hang Seng has experienced an impressive short covering rally. The lows need to hold if the benefit of the doubt is to be given to recovery. Clear evidence of stimulus would help that along.