China reportedly sees jump in Covid-positive tests in May: What it means to investors

China saw a 40% jump in Covid-positive tests in May, according to Bloomberg News. Paul Donovan, Chief Economist at UBS Global Wealth Management tells Yahoo Finance Live what that data could mean to U.S. investors.

Video Transcript

JULIE HYMAN: Paul, hang around for just a moment because there is another topic we want to turn to with you, and that has to do with China, which is now facing a COVID resurgence. Positive test results rising to 40% in May. That's according to government data released over the weekend. And it's the highest level the country has seen since January.

Obviously there has been a lot of attention continued on China's economy and the implications globally as well. Paul Donovan, UBS Global Wealth Management chief economist is still with us. And Paul, not only as a-- because Chinese consumers are a powerful force, right, because they travel as well, but also because of the importance still in the supply chain. So how should we be thinking about this latest wave in China and whether it is going to have a big impact?

PAUL DONOVAN: So when an economist looks at something like a pandemic, we are not necessarily interested in case counts and things like the virus. Whilst that can obviously be very traumatic for the individual, economically what matters is fear of the virus because fear is what changes behavior.

So the question is not, is the case number high. The question is, are people changing their behavior as a result of this? And I think if we look back over the course of the last three years, fear levels have shifted. You know, the prevalence of vaccinations, improved treatments mean that fear levels are generally lower.

So we now need to look ahead and see, OK, are people's behavior patterns changing as a result of this situation? And if they're not, the economics of this is fairly negligible. When it comes to the Chinese economic revival, this has actually been quite parochial. It's been quite inwards-looking.

So the focus has been very much on domestic service spending, understandably. I mean, families have been kept apart for two, three years. People are traveling around, seeing friends and relations. So in that situation, the impact of China's reopening on the global economy has been quite muted because it's domestic restaurant meals, internal flights, rather than buying goods or traveling abroad, both of which would have a greater external impact.

BRAD SMITH: China and India were looked at as the two economies that would be driving most of the GDP growth over the course of this year, and so do you think revisions now need to be put forward?

PAUL DONOVAN: Well-- so the thing here is that when we look at global growth-- I mean, global growth is just a weighted average. And China, India, just by the size of their populations, have a large weighting in that. But actually, what really matters most of the time is the way in which China or India are growing, having an impact on exports in the United States or exports from Europe because that then transmits the growth through to those economies.

And as I said, because the Chinese growth revival has been quite inward-looking rather than external, there's not been a huge amount of international travel. They've not been focusing so much on purchases of goods. It's more been about purchases of domestic services. The impact has not been that great on other countries.

So if the question is, do we need to revise US GDP estimates because of what is happening in China, the answer is probably no. If we are talking about a global growth aggregate, then yes, obviously that will go up and down with China's growth number because China is a significant sized economy. But the transmission to other economies, I think, is relatively limited at the moment.

JULIE HYMAN: Is there anything that's going on now geopolitically between the US and China that would lead you to tweak your estimates or that you think especially bears watching? I believe the latest today was a story out of the Wall Street Journal that said the US is going to allow, for instance, companies based in Taiwan to also operate in China without some of the restrictions that are on Chinese-based companies.

PAUL DONOVAN: A lot of the geopolitical stuff at the moment, it's of a level where it affects individual companies but it's not necessarily transformative in terms of the trends that are already established. Things like localizing production, these are underway for sound economic reasons. It becomes more efficient to produce closer to your consumer. Technology changes, and no one is making large numbers of compact disks in China anymore because nobody uses compact disks anymore.

So you know, you're seeing these changes come through. So we're getting a certain amount of noise. And for individual sectors or individual companies, that may well matter. For the broad, macroeconomic picture, I don't think at this stage, you know, we're seeing anything which is changing the general trend of direction.

JULIE HYMAN: Paul, thank you so much for spending some time with us this morning. Paul Donovan is UBS Global Wealth Management chief economist. Thanks again.

PAUL DONOVAN: Thank you.