China’s decision to announce a significant easing of Covid-19 restrictions will cheer multinationals. The decision to cut quarantine times for inbound travel by half will come as a relief to residents and business groups. Just don’t take this change as a sign that China is close to returning to normal.
Companies that trumpet confidence in a quick rebound for the world’s largest consumer market are being overly optimistic. China’s determination to stick to its zero-Covid policy means mass testing, quarantines and lockdown measures will continue. Earlier this month, multiple neighbourhoods in Shanghai were placed under lockdown just one day after city-wide restrictions were lifted.
Downbeat earnings guidance issued by sportswear giant Nike is likely to be replicated by more consumer companies in the weeks to come.
Nike shed nearly $10bn in market value on Tuesday following first-quarter and full-year forecasts that came below expectations. Although Greater China accounted for just under a fifth of Nike’s sales in 2020, the country is one of the company’s most profitable markets, generating almost half of group earnings before interest and taxes that year.
China’s lockdowns have hit more than just Nike’s sales in the country. These fell 19 per cent in the fiscal fourth quarter that ended on May 31, while ebit from the region slumped 55 per cent. Factory and warehouse shutdowns have also created supply chain issues in other markets, pressuring margins and driving up costs.
For Nike, the problems in China exacerbate a host of existing issues. These range from the strong dollar to higher input and freight costs and the fear of a looming recession in the US. This is reflected in the 36 per cent drop in the share price this year. China’s middle-class consumers will remain an important source of growth for the world’s consumer goods companies. But recovery will take years, not months.