China’s Economy Faces More Damage as Megacity Chengdu Locks Down

China’s economy is bracing for more pain as the lockdown of megacity Chengdu in the west of the country damages business and consumer activity in the area and hurts sentiment more broadly across the nation.

The lockdown of the city of 21 million people, which will last at least four days but could be extended if more Covid cases are discovered, will likely result in a slump in retail and restaurant spending. It could also force factories and companies to shut if staff can’t go to work. Chengdu’s economy makes up 1.7% of China’s national gross domestic product, and is the sixth-largest city after Beijing, Shanghai, Shenzhen, Guangzhou and Chongqing.

The city is the capital of Sichuan province, which has already been hit by severe drought and floods in recent weeks. A power crisis caused by the heatwave forced some factories in the province to shut last month. 

The closure of the city “will deal another major blow to the economy when it’s already struggling from a barrage of shocks,” David Qu, an economist at Bloomberg Economics, wrote in a report. While this won’t be as damaging as the Shanghai lockdown, which lasted about two months in the spring, “we do expect a widespread impact on sentiment that amplifies the damage beyond the direct hit to activity,” he said.

Chengdu has already been reporting quite weak economic data this year, with retail sales falling in the first seven months of the year, government revenue shrinking and industrial output losing steam. In the first six months of this year, the city’s economy expanded just 3%, well below the 13.1% it grew in the same period in 2021.  

Chengdu isn’t the only major city in China currently under restrictions to control the spread of the virus. Tianjin and Shijiazhuang near Beijing, and Dalian in the northeast have stronger controls in place. A few districts in the technology and manufacturing hub of Shenzhen have also announced tighter Covid controls. 

“Covid hotspots are shifting away from several remote regions and cities -- with seemingly less economic significance to the country -- to provinces that matter much more to China’s national economy,” Nomura Holdings Inc.’s economists led by Lu Ting wrote in a report.