Large industrial and transportation centers located on the Chinese coast, where lockdowns-caused slack translates into foreign economies particularly fast, are gradually removing restrictions on the movement of people and transportation. Local governments are urging factories to resume production as each idle day nurture the idea among foreign partners that it is crucial to diversify supply and always have a backup plan. Which certainly doesn’t include China.

The government extended Lunar Year holidays by10 days, but it wasn’t enough to suppress the epidemic to the state that would allow to safely lift lockdowns in the epicenter and nearby provinces. The situation reminds Scylla and Charybdis:  the lockdowns laid the foundation for realignment of global supply chains while expectations of prolonged downtime speed up this irreversible process; on the other hand, an early retreat will certainly reassure trading partners, but will make the course of the epidemic less manageable and predictable. Which in the end can lead again to quarantine, but to a much more expensive one.

If we try to speculate about how China can choose the “least of evils”, I think the best choice is simply the most certain outcome. It’s no doubt that short-term benefits from each day on the lockdowns are less clear and tangible (in terms of containing the infection) than the benefits from each day without quarantine (which can be directly measured through increased production and shipping volumes, etc.). The medium-term benefits (or damage) of both scenarios are even more difficult to predict. China officials also understand that prolonged quarantine undermines the "general immunity" of the Chinese economy so it’s better to not drag it out despite all the risks.

Lockdowns bereaved the manufacturing sector of the most valuable production factor - labor, and the situation is exacerbated by specifics of labor migration within China. Production in a relatively low virus threat province may stall because migrant workers may be stuck in the quarantined province. This is especially true of coastal regions, where everyone is drawn because of more attractive wages. To solve the problem of labor migration, authorities of some Chinese cities organized flights to transport workers.

Authorities in Foshan City in southern China, where electronics and home appliances production are concentrated, said on Tuesday that local businesses no longer need to get permission to resume production and to attract workers without mandatory medical screening. The city near Foshan also removed administrative barriers, albeit in a lesser extent.

In eastern Zhejiang, cities like Hangzhou and Ningbo also allowed companies to resume business without notice.

Morgan Stanley buoyed sentiments with a statement that macro and micro data indicate a slow but sure recovery in production activity in China, which will reach 60-80% of normal level by the end of February and normalize by mid or late March. However, if China is unable to restrain the development of the epidemic over the next two weeks, the disruption in production will stretch to the second quarter.

The consensus forecast for the growth of Chinese economy in the first quarter has been frequently revising, but currently it is about 3-4% YoY.

Now it’s probably worth to turn focus to South Korea, where on Wednesday the number of clinically confirmed cases has surged by 20 people, to 51. So far, the government has announced that it does not plan to announce quarantine in epicenters and increase the level of state alert in the country. But it seems that only for now.

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