Oil Markets Jittery As Chinese Tech Hub Returns To Lockdown

• Shenzhen and Chengdu are back in lockdown after a recent outbreak of Covid.
• The two economically vital cities are at a complete standstill, though key favortires were able to keep production running under closed loops.
• Oil prices have faced downward pressure from China’s COVID lockdowns, which signal reduced future demand.

Just a couple of months after reopening the economy, the main districts of Chinese tech hub Shenzhen has gone back to into lockdown, extended curbs on public activities, and shut down public transport on Friday as cities across China continue to battle fresh COVID-19 outbreaks that have dampened the outlook for economic recovery.

Authorities in Beijing have directed that residents in six districts comprising the majority of the city’s population of 18 million be tested twice for Covid-19 over the weekend with employees required to work from home. 

An exception has been made for employees who work in self-contained "closed-loop" operations, public services and essential supplies. For instance, in the southwestern metropolis of Chengdu, factories including plants run by auto giants Toyota and Volkswagen have kept production running under closed loops. Chengdu’s 21 million people were placed under lockdown on Thursday.

Oil prices this week have been dominated by downward pressure from China’s COVID lockdowns, which signal reduced future demand. 

Back in May, the oil price rally came to a screeching halt after Beijing adopted a “Zero-Covid” strategy and announced strict Covid-19 containment measures including major lockdowns. Whereas the strict lockdowns and curfews successfully slowed down the country’s latest Covid-19 outbreak, they had a negative impact on Chinese consumer demand and manufacturing output. 

Unfortunately, the ailing Chinese economy cannot be fixed by simple measures like lockdowns this time around, with growing signs that the Chinese economy may be entering a prolonged era of slow growth. 

The world's second-largest economy is projected to grow just 2% this year, significantly lower than the 2.8% increase in U.S. gross domestic product. Maintaining a COVID-zero policy has been slowing the economy and adding huge additional costs to the government budget, leaving Beijing in a dilemma about whether to boost debt or tolerate weak economic growth. 

Fiscal tensions were already mounting before Covid spending pressures came along, including a slump in land sales revenue due to the housing slowdown as well as tax relief to businesses that cut government income. Indeed, official data shows the wide-ranging budget deficit reached a record nearly 3 trillion yuan ($448 billion) in the first five months of the year.

By Alex Kimani for Oilprice.com

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