Weifeng Zhong, Senior Fellow at George Mason University's Mercatus Center, discusses the takeaways from China's manufacturing data and how China's COVID lockdown is impacting the region's economic outlook. 

Opening Bell

China Manufacturing Output Drops to Lowest Level in 2 Years

here to discuss his way? Fang song, senior fellow at the George Mason University Mercatus Center. I'm going to have you on this morning china's manufacturing and service sectors punched their worst levels in two years. Just noted, do you see this as a trend and if so or if not, what's the accurate level of concern of weight that once you put on that good morning to you, Alicia and thanks for having me and that's certainly a concerning trend. And as you mentioned, this is already the second month when we see activities decline. And that has a lot to do certainly with the lockdown situation in shanghai. Because if you look at the shanghai economy alone, it may not be a huge fraction of the chinese economy, but you also have to count the provinces that's nearby shanghai. For example, if you think about Alibaba whose headquarter is in the city called Hangzhou, which is just a few hours, a couple of hours away from Shanghai. And so the entire region surrounding shanghai accounts for actually a quarter of china's GDP. So that's a huge fraction. That's at jeopardy because of the draconian lockdown policy. So I have a lot of concern about the outlook of the chinese economy because it doesn't seem like Beijing will be changing course in terms of how it deals with the spread of Covid anytime soon. Well, let's talk about, let's talk about how they're dealing with, you know, authorities in china that it's certainly trying to navigate this challenge associated with their Covid policies. How are they dealing with it? Exactly. And are the lockdowns in shanghai in Beijing working at least in the covid front. Because we know in the economic front not so much. Yeah, that that's a great question because if you think about the lockdown, the history of lockdown policies in china since the beginning of covid 19 pandemic in early 2020 it actually has had a lot of success up to this point because that was before the omicron variants come up. So the virus was less transmissible and locking people down in terms of the economic costs and benefits, it may have played quite well in the past in other cities like Wuhan for example and including Beijing as well as Beijing also had a lockdown, you know earlier in 2020 not as severe I assume, but the now it's coming back to haunt them because the same success has actually motivated Beijing of the chinese authorities in general to keep on this path. And certainly that's not working now because of the omicron variants. And you know, who know, who really knows how effect effective the chinese vaccines really are. I bet that even officials in Beijing may not have a very good idea either. It's certainly a valid point. And so to your point there it's not only not effective in the fight against Covid 19, but it is hurting the economy. I mean to the point where chinese officials say they expect GDP to rise 5.5%. However, the I m F. Has cut that by about a full percentage 4.4% is their forecast for china. What's your outlook on the economic growth that that you think will actually end up seeing? Well I think it's quite likely that the real GDP growth might be close to zero or even negative and of course it depends on how the rest of the year plays out. But it's it's funny when people pay too much attention to GDP numbers. If you ask the chinese premier li Keqiang who's not really getting much air time now because of the dominance by President Xi Jinping in china. But he actually used to say That he doesn't actually believe in GDP numbers. Instead he would look at other indicators for economic activities like electricity consumption or factory manufacturing activities like the one you quoted and if you look at those numbers or you know air traffic numbers for example, now all these are basically back to the initial the beginning of the pandemic in early 2020 when its way down. So now it basically, in terms of economic activities, I say it's as bad as the beginning of Covid. So I'm not optimistic at all and I have a lot of concern especially if this continues on to make other major cities like Beijing. And to your point there it does seem like there is some level of concern even within the leadership in china because they are trying efforts to kind of boost or stimulate the economy, even signaling the ease of regulation within the tech sector. What is relaxing the tech sector in china? Really mean for government policies and the corporate sector, I think of names like you know Alibaba Tencent JD and the likes. Yeah, I think this is a typical pattern. So in fact I maintain the project at Mercatus Center called the Policy change index that basically monitors whether chinese government alters this talking point in terms of the priority of the chinese economy. And what we have seen is that It hasn't changed since early 2000s that the chinese government is trying to use intervention, government interventions to solve a lot of market economy problems. And that's the same with the tech crackdown because it saw earlier on last year about the problems presented by these tech platforms that we wanted to crack them down. But once it's hurting the economy it will take this hand out. So that's a typical pattern. I don't see it changing anytime soon either. Yeah, I think many are in the same camp with you. We're going to leave it there way. Thank the bells coming up. Really appreciate your time and your insight insight way. Fang song senior fellow at the George mason University, Mercatus Center