China fights Delta variant

Rising new infections with the Delta variant have been reported in China in recent days. Although a daily increase of less than 100 -" out of a population of almost 1.4bn -" seems very small, drastic travel restrictions have been put in place by local health authorities to immediately contain the virus.

All flights from Nanjing and Yangzhou airports (Jiangsu province) were suspended after media reports said a cluster with the Delta variant had spread to more than 20 cities and more than a dozen provinces. Rail, bus, and air services from Beijing to the affected areas were also suspended and mass testing and environmental disinfection were carried out there, with local quarantine regulations imposed. In addition, all citizens of China have been asked not to travel to areas of medium or high COVID-19 risk, and not to leave provinces where they live unless absolutely necessary.

China succeeded in rapidly containing the virus in spring 2020 through strict containment measures. As a result, the economy recovered rapidly. This time, too, China is trying to quickly combat locally occurring infections in order to stabilize the situation and avoid widespread lockdowns. It should be helpful that, according to the National Health Commission, about 1.69bn doses of the COVID-19 vaccine have already been administered. These are considered to be highly protective against severe cases.

China's zero covid policy makes it difficult to assess further containment measures and thus the impact on the economy. From the trade statistics, however, it is at least possible to estimate for which sectors there is the highest risk should there actually be a noticeable slowdown in China.

In the case of exports, the trade link between the euro area and China is smaller than in the case of imports. Just under 9% of Eurozone exports go to China. Exports of electrical machinery account for 16% of total Eurozone exports of this product category, while those of road vehicles account for 13%.

By country, Germany unsurprisingly stands out, accounting for just under half of all euro area exports to China in 2020. Also measured as a share of GDP, German exports are the most exposed to China, closely followed by Ireland and Slovakia.

Overall, imports from China accounted for 16.5% of Eurozone imports in 2020. Of these, more than half were in the product category Machinery and Transport Equipment. In absolute terms, Telecommunications and Sound Recording and Reproducing Machinery accounted for the largest amount within this category. Looking at shares, the euro area's greatest dependence is in Office and Computing Machinery and Communications and Sound- Recording and Reproducing Machinery, where 50% and 46% of imports of these products come from China, respectively. The concentration in some product categories makes the Eurozone’s dependence on China much greater for imports than for exports.

Looking at the risks by country, the Netherlands stands out, importing goods from China worth 11% of GDP. More than half of these are in the product categories mentioned above (office and data processing machinery or communications and sound recording equipment). However, the Netherlands re-exports the vast majority of this to other EU countries. The import figures, therefore, overestimate the risk to which the Netherlands is exposed but underestimate that of the other Eurozone countries.

In general, trade statistics can only give a rough overview of the risks. Here, too, the devil is in the detail. The bottlenecks in semiconductor production have shown how relatively small components in terms of value can slow down entire production processes. Also, a key "detail" is that, while China has a relatively small share of global semiconductor production, at just under 8% (2019), so the risks should be relatively small. However, if a COVID-19 outbreak occurs in the center of China's semiconductor industry (Jiangsu), then there are risks for globally noticeable impacts as well.

Even if recent developments in China pose some risk to the Eurozone economy, the potential is relatively small compared to the positive factors. Steps towards the opening, rising employment, and the EU's recovery plan are for us the decisive determinants for the economy during the coming quarters and these argue for high growth.  

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