China’s unshakable dedication to eradicating Covid by shutting down major cities like Shanghai risks causing a major economic shock, putting more strain on global supply lines, and fueling inflation.
Shanghai, China’s largest financial center and home to some of the country’s greatest seaports and airports, has been under lockdown for 12 days and shows no signs of ending.
Small businesses have been particularly severely hit, with shops and restaurants forced to close. Many Chinese and Taiwanese firms, including Tesla, are unsure when they will be able to reopen their plants. Meanwhile, port delays are worsening, and air freight charges are skyrocketing, putting even more strain on global trade.
The country’s severe regulations have dashed any hopes of it relaxing its zero-tolerance policy toward Covid-19.
“The growing number of instances in Shanghai has persuaded top officials that there is no middle ground between no Covid and living with it. Snap lockdown may become the standard method in the future “In a research paper released this week, Larry Hu, Macquarie’s senior economist for Greater China, stated.
President Xi Jinping has promised to “minimize” the economic impact of his Covid policy, but the growing situation in Shanghai — and the ensuing lockdown — raises serious doubts about Beijing’s response to outbreaks of Omicron, a far more virulent form of the original virus.
“Because the Omicron form is extremely contagious, China’s ‘zero-Covid’ targets have become increasingly difficult to achieve, while most other countries opt for a ‘living with Covid’ approach,” Ting Lu, managing director and chief China economist at Nomura, said in a note earlier this week.
He predicts that the rising number of instances and expanding lockdowns in Shanghai and other Chinese cities will stifle activity in a variety of industries, including in-person services, travel, logistics, construction, and possibly manufacturing.
“The economic costs could be catastrophic,” Lu warned, adding that global investors may be “underestimating” the economic and market implications of China’s zero-Covid policy.
Businesses that are in trouble
According to Nomura’s latest estimates, full or partial lockdowns have been enacted in around 23 cities since last month. These cities have a combined population of 193 million people, accounting for 13.6 percent of China’s population, and generate 23 trillion yuan ($3.6 trillion) in GDP, accounting for 22% of the country’s GDP.
“These estimates may understate the true impact, as many other cities have been mass testing district by district, and mobility in most parts of China has been severely limited,” Lu said.
According to stock exchange filings in Shanghai, Shenzhen, and Beijing, at least 40 Chinese enterprises had been compelled to halt operations in Shanghai and other regions by Thursday.
According to filings with the Taiwan Stock Exchange, more than 90 Taiwanese companies have reported that the lockdowns have impacted their operations in Shanghai and the neighboring city of Kunshan, including printed circuit board manufacturer Unimicron Technology and top bike maker Giant Manufacturing.
Wounds that are getting bigger
The World Bank and some investment institutions have recently warned that China’s zero-Covid policy is wreaking havoc on the economy.
The World Bank lowered China’s 2022 growth prediction on Tuesday, predicting that the world’s second largest economy will now grow at 5% this year, down from 8.1 percent last year. This is also less than China’s proclaimed goal of 5.5 percent.
“Continuation of China’s zero-Covid policy in the face of the Omicron variant will harm economic activity in China and have negative spillovers to the rest of the region,” the World Bank stated in its recent East Asia and Pacific economic update.
China’s growth prediction for 2022 was kept at 4.5 percent by Goldman Sachs on Monday, a full point below the official aim. However, the bank noted that the new outbreak and the Shanghai shutdown are beginning to “weigh more heavily” on China’s economic activities.
Meanwhile, Citi has predicted that the Omicron wave will slow China’s GDP growth by 1% in the first quarter. According to a research released this week, a protracted Omicron wave could shave 0.6 to 0.9 percentage points off GDP growth in the second quarter.
It could get a whole lot worse.
The shutdown in Shanghai comes at a time when the country’s economy is already in trouble.
Last month, both services and manufacturing took a beating. Since the initial Covid-19 outbreak in Wuhan in February 2020, the Caixin Purchasing Managers’ Index (PMI) for services has dropped at the fastest rate.
In addition, the Caixin manufacturing PMI shrank at its fastest rate in two years. Official PMI figures revealed the decline in economic circumstances.
Economists cautioned that April’s figures might be even worse, as lockdowns continue to stifle domestic consumption.
“Many people are worn out, unemployed or underemployed as a result of numerous rounds of lockdowns, and their finances have been depleted to the point where they now have to cut back on expenditures,” said Lu of Nomura.
Effects of spillover
The Chinese crisis is a global issue as well.
China’s slowdown, along with the crisis in Ukraine and Fed rate hikes, is one of the key shocks facing Asian economies this year, according to the World Bank.
Shipping delays have worsened as a result of the situation in Shanghai, which possesses the world’s largest container port, putting greater strain on global supply networks. Despite Chinese authorities claiming that the Shanghai port is still open, industry statistics revealed last week that the number of vessels waiting to load or discharge had reached an all-time high.
“Shutdowns have a variety of effects on supply chains, including industrial closures, port delays, and truck driver shortages,” said Zvi Schreiber, CEO of Freightos, a Hong Kong-based freight booking platform.
It could lead to “further inflationary pressures” on Chinese imports.
Air freight charges are also on the rise. All passenger flights to Shanghai have been canceled, making it one of the world’s busiest airports. According to Schreiber, air cargo rates between Shanghai and northern Europe increased by 43% last week compared to the week before the outbreak.
Factory closures in Shanghai and adjacent towns might exacerbate supply chain disruptions in the electronics and automobile industries.
Unimicron Technology, based in Kunshan, offers printed circuit boards to companies like Apple, whereas Eson Precision is a Foxconn subsidiary that manufactures iPhones. Tesla receives components from Eson Precision as well.
“Given the severity of the current outbreak in China, it’s quite likely that electronics and automotive supply chains will be severely disrupted owing to supplier disruptions in the next 7-10 days,” said Julie Gerdeman, CEO of supply chain analytics firm Everstream.