Covid-19 is spreading rapidly in Hong Kong, a potential forewarning of what may come in China. With less-efficient vaccines and an ambition to move away from its ‘dynamic zero’ Covid-19 policy, continued containment and economic growth are likely to be weighed against one another. The impact on shipping is still unclear, but widespread lockdowns in China would be negative for most shipping segments, in our view. If the pandemic-related measures are eased, we see a likelihood of less congestion and more dry bulk demand.

Covid-19 cases surging despite 70% vaccination rate in Hong Kong. The number of Covid-19 cases in Hong Kong is surging, with 32,527 new cases and 117 deaths reported on Tuesday (of c800 total assumed deaths during the entire pandemic). The high vaccination rates have failed to contain the spread of the virus, most likely because 40% of the administered vaccines have been the less efficient Sinovac version. We believe a lockdown may be introduced, as Hong Kong appears to be considering its most severe measures since the pandemic’s start.

A ‘stress test’ for China’s potential move away from ‘zero Covid-19’ policy. China has opted to use domestically developed vaccines that have lower efficacy against the recent variants. In addition, only 50% of the 36m people above the age of 80 have been vaccinated, with the reported fatality rate at 21.5% for unvaccinated persons. Hence, Chinese officials appear to be closely monitoring the situation in Hong Kong as a ‘stress test’ of how to cope with the spread of the virus, as they consider a possible change from the ‘dynamic zero’ Covid-19 policy, although we believe a large-scale shift is unlikely before next year.

If virus spreads in China, lockdowns or not? To the best of our knowledge, the soaring numbers in Hong Kong could be an early sign of what is to come in China. If so, the question is how China will deal with the situation. Following the Olympics and given the possibility of a stagnating global economy, we believe Chinese growth should be in focus. However, the country’s strict management of the pandemic is also likely to be a core focus going forward. In light of the low vaccine efficacy in the country, lockdowns could be the only viable solution.

Either positive or negative for dry bulk. On the one hand, if strict lockdowns affect Chinese growth, we believe dry bulk should take a hit. On the other hand, stimulus and growth could be highly advantageous for dry bulk demand, especially if designed to counteract negative international impulses.

Lockdowns would likely restrict oil demand and take pressure off containers. We believe lockdowns would affect oil import demand. A pause in Chinese production could also alleviate supply chain pressures in the container industry and allow the vaccinated western world to regroup.

Inefficiencies in shipping to China could subside. We also note the likely impact on inefficiencies for shipping related to China’s pandemic-related controls, which should be reversed if the ‘zero Covid-19’ policy is abandoned. In our view, this would primarily affect containers and dry bulk, thereby freeing up capacity in the market.