China’s economy may get an Omicron bump—but it’s likely to be short-lived

This month, China’s official manufacturing Purchasing Managers’ Index (PMI)—a monthly survey of enterprise purchasing managers that measures business conditions like costs, new orders, output, employment, and selling prices—rose to 50.1, up from 49.2 in October, the National Bureau of Statistics (NBS) announced on Tuesday. A PMI above 50% indicates that the manufacturing economy is growing.

Easing power supply shortages coupled with “significant” price drops in some raw materials helped bring China’s manufacturing PMI “back to expansion territory,” said NBS senior statistician Zhao Qinghe. Over the weekend, China’s industrial companies recorded a jump in profits—24.6% year on year in October to $128.1 billion—with metals refining and energy companies reporting the biggest gains.

Chinese factories could see another uptick if the new Omicron strain of COVID—named a “variant of concern” by the World Health Organization (WHO) on Friday—spreads more widely and rapidly. Little is currently known about the new Omicron variant, but scientists are concerned about the strain’s unusually high number of mutations, which could make it more transmissible and more resistant to COVID-19 vaccines.

If Omicron forces governments to delay economic reopenings, “foreign demand for [Chinese exports will] stay elevated for longer,” Capital Economics’ chief Asia economist Mark Williams wrote in a Tuesday report. China’s export volumes have remained strong in the past 18 months as overseas retailers rush to restock consumer goods, which have been in high demand throughout the pandemic.

At the same time, elevated demand for Chinese exports as a result of Omicron may further stretch shipping capacity that’s already running thin, which would limit how much China’s industrial export sales can grow, says Williams.

Omicron will also test the sustainability of China’s ultra-strict COVID-zero strategy that relies on mass lockdowns, extensive contact tracing, and locked borders. On Oct. 31, for instance, Chinese authorities locked down Disneyland in Shanghai after a woman who visited the park the day prior tested positive for COVID, trapping 33,000 visitors inside the park for hours until they received a COVID-19 test.

The global spread of a COVID variant that may be more transmissible is a “particular challenge for a country trying to remain COVID-free,” says Williams. “But after nearly two years of success suppressing infections domestically, the bar [is high] to changing course before better medical treatments or vaccines are available.” Most analysts expect China to maintain its COVID-zero path until at least the end of 2022.

But should Omicron prove more difficult to contain than Delta, Chinese officials will likely tighten COVID-zero measures in response. That would lead to “further intermittent disruption to domestic [economic] activity, particularly services, and to global supply chains,” says Williams.