There is no easy exit strategy from zero-Covid for Xi Jinping. The CCP has been trapped by its own (draconian) policy. The only thing worse than three years of zero-Covid, will be three years of zero-Covid followed by an uncontrolled wave of Covid infections and a rising death toll. The anger would erupt.
The pressure on Xi Jinping is likely to build, and the protests will gather momentum, as the authorities take a tougher line to stem Covid infections. The crackdown on protestors will become more violent as anger grows, and companies that still have a presence in the US will be forced to accelerate their plans to shift out of China.
The immediate impact is a further hit to Chinese growth. The Chinese PPI will fall deeper into deflation, and core CPI inflation will slow further. The trade weighted RMB will continue to decline.
For the West, the protests offer a glimpse to severe deflationary risks (notably commodities, shipping containers), should the protests lead to political upheaval, and production outages. But we should not lose sight of the disruption to supply chains, that would lead to price spikes for finished goods. The hit to economic growth is a sure bet: the impact on US and European CPIs is less clearcut.
It will be important to keep an eye on the next stage of the crisis in China: LGFVs. Local government finances have been hit by the drop in land sales revenues. According to Bloomberg, “China’s 31 provincial governments have a stockpile of outstanding bonds that’s close to the Ministry of Finance’s risk threshold of 120% of income.”
