China tail risk for global economy

An underpriced economic tail risk facing investors is from the China slowdown associated with zero tolerance COVID lockdowns. The CAIXIN China composite PMI fell to below 40 this week, the worst reading since the beginning of the pandemic. 

The COVID economic crisis has come full circle back to China and this adds another supply shock to the global economy. The congestion, both inbound and outbound, at ports in China is significant. Deliveries within China have been curtailed. Factories have been shut. This disrupts global manufacturing supply chains and trade. Commodity prices are being capped based on the lower demand in China. 

The China contribution to global GDP has been significantly greater than the US, so a slowdown will have spillover effects.

The financial flows have decidedly turned against China like other economic crises. The currency has been devalued, but with a supply shock the price does not matter if the goods cannot be produced or shipped. While there has been a focus on inflation and the financial shock, the real economy will still be driven by real events like COVID shutdowns.