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China’s woes could reduce demand for Australian iron ore and other commodity exports

China’s widening virus lockdowns are emerging as a new economic threat alongside rising inflation amid concerns they could reduce demand for Australian iron ore and other commodity exports.

Despite data on Tuesday showing the world’s second biggest economy recorded a strong start to 2022, economists are scaling back their growth forecasts for China to reflect the likely impact of the lockdowns and higher energy prices.

The reduced projections came as minutes from last week’s board meeting of the Reserve Bank underscored the concerns about inflation, which is now trending towards a 10-year high.

“Members agreed that a key issue for the inflation outlook was whether recent price adjustments represented a one-off shift in the level of prices or the beginning of a period of ongoing price increases,” the RBA minutes said.

Beijing has shut down several big cities and imposed travel restrictions on tens of millions of people as part of its COVID-zero policy in order to control the sharpest rise in community infections in two years.

On Tuesday, Langang, just 55km from Beijing, followed the tech hub of Shenzhen into lockdown.

The north-eastern province of Jilin, home to 24 million people, was locked down on Monday, with residents also banned from leaving the province.

The Shenzhen lockdown has disrupted production of Apple iPhones and Toyota and Volkswagen cars, while in Shanghai, which has been partially shut down, 106 international flights scheduled to arrive from March 21 will be diverted to other domestic cities.

Tuesday’s data shows Chinese industrial production jumped a better-than-expected 7.5 per cent in the first two months of the year.

However, the lockdowns have sparked fears of a slowdown because the COVID restrictions threaten to reduce consumption and reduce demand for products and the commodities underpinning manufacturing and infrastructure.

Singapore iron ore futures retreated nearly 9 per cent to $US143 a tonne, triggering losses of as much as 4.9 per cent by the Pilbara’s iron ore miners.

Morgan Stanley expessed its concerns by cutting its economic growth forecast for China for the current quarter to zero from 0.6 per cent,with the investment bank now tipping the country will miss its annual growth target of about 5.5 per cent.

“The double lockdowns sent a clear message that Beijing is prioritising COVID containment over the economy, and a recalibration of its COVID strategy will likely be delayed,” Morgan Stanley’s chief China economist Robin Xing said.

“Higher infrastructure spending and an easing of housing policies can be expected, but the larger issue remains finding a COVID exit strategy,” he said.

Morgan Stanley cut its 2022 forecast for economic growth to 5.1 per cent from 5.3 per cent previously.

ANZ has warned that the lockdowns could cut 0.8 percentage points from China’s gross domestic product growth rate if other provinces on the country’s coastline and north-east are also locked down.

NAB followed Morgan Stanley by reducing its growth forecast to 5 per cent from 5.1 per cent, but its revision mainly reflected the impact of higher global energy prices as a result of the Ukraine invasion.

However, the bank noted the threat of COVID-19 in suggesting that China’s 5.5 per cent annual rate “appears to be highly ambitious in the current environment”.

“China’s growth momentum was weak heading into the new year, reflecting subdued growth in domestic consumption, limited additional support from global trade and slowing activity in the property sector, while COVID-19 remains a risk, due in part to the relatively low efficacy of domestic vaccines against the Omicron variant.”

OANDA senior market analyst Jeffrey Halley said that Tuesday’s China economic data for January and February was “all the more impressive” given the virus restrictions over the Chinese New Year.

However, Chinese stocks markets finished sharply lower again on Tuesday after stocks were routed on Monday, with investor worried both about the lockdowns and the threat of sanctions against China if it sides with Russia in the latter’s war in Ukraine.

“There are plenty of storms blowing through China right now, not least the lockdown of Shenzhen yesterday to limit omicrons spread.“Fears continue to dog stock markets, that lockdowns could spread, which would severely impact China’s growth,” Mr Halley said.

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