Lockdowns in Shanghai and other Chinese cities pose a growing threat to the economy

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Shanghai – home to China’s main financial center and some of its largest seaports and airports – has been in lockdown for 12 days, and there’s no sign of it ending.

Small businesses have been hit hard, with shops and restaurants forced to close. Tesla, as well as many Chinese and Taiwanese manufacturers, do not know when they will be able to restart their factories. Meanwhile, port delays are getting worse and air freight rates are skyrocketing, putting even more pressure on global trade.

The tight restrictions have dispelled any expectation that the country might relax its zero-tolerance approach to Covid-19.

“The surge in cases in Shanghai has convinced top leaders that there is no middle ground between zero-Covid and living with Covid. Going forward, instant lockdown may be the dominant strategy,” Larry said. Hu, chief economist for Greater China at Macquarie, in a research report this week.

President Xi Jinping has vowed to ‘minimize’ the economic impact of his Covid policy, but the deteriorating situation in Shanghai – and the prolonged lockdown – raise tough questions about Beijing’s approach to coronavirus outbreaks. Omicron, a much more infectious variant of the original virus.

“The Omicron variant is highly contagious, and it has become increasingly difficult for China to achieve its ‘zero-Covid’ goals while most other countries are opting for a ‘living with Covid’ approach”, said Ting Lu, managing director and chief economist for China. Nomura, wrote in a note earlier this week.

He believes rising cases in China and escalating lockdowns in Shanghai and several other cities will suppress activity across a wide range of sectors, including in-person services, travel, logistics, construction and some manufacturing industries.

“The economic costs could be staggering,” Lu said, adding that global investors may be “underestimating” the impact of China’s zero-Covid policy on its economy and markets.

Companies in difficulty

Since last month, full or partial lockdowns have been put in place in about 23 cities, according to the latest estimates from Nomura. These cities have a combined population of around 193 million – 13.6% of China’s population – and contribute 23 trillion yuan ($3.6 trillion) to GDP – 22% of the country’s economy.

“These figures could significantly underestimate the total impact, as many other cities have conducted district-by-district mass testing, and mobility has been significantly restricted in most parts of China,” Lu said.

Tesla unable to restart Shanghai production on Monday
As of Thursday, at least 40 Chinese companies had been forced to suspend operations in Shanghai and other regions, according to stock market deposits in Shanghai, Shenzhen and Beijing.
Meanwhile, more than 90 Taiwanese companies have reported that their operations in Shanghai and the nearby city of Kunshan have been affected by the shutdowns, including circuit board maker Unimicron Technology and major bicycle maker Giant Manufacturing, according to deposits on the Taiwan Stock Exchange.

Growing wounds

The World Bank and some investment banks have recently warned that the damage caused by China’s zero Covid policy to the economy is worsening.

The World Bank on Tuesday slashed China’s growth forecast for 2022, estimating that the world’s second-largest economy will now grow by 5% this year, down sharply from 8.1% last year. This is also below China’s official target of around 5.5%.

“China’s continuation of zero-Covid policies in the face of the Omicron variant will harm economic activity in China and have negative spillover effects on the rest of the region,” the World Bank said in its latest economic update for the region. East Asia and the Pacific. .

Goldman Sachs on Monday maintained its 2022 growth forecast for China at 4.5%, a full point below the official growth target. But the bank stressed that the latest outbreak and the lockdown in Shanghai are starting to “weigh more heavily” on economic activity in China.

Citi, meanwhile, said the Omicron wave could lower China’s GDP growth by 1 percentage point in the first quarter. A prolonged Omicron wave could deduct between 0.6 and 0.9 percentage points from second-quarter GDP growth, it estimated in a report this week.

It could get worse

Shanghai’s lockdown comes at a time when the country’s economy is already struggling.

Services and manufacturing were hit hard last month. The Caixin Purchasing Managers’ Index (PMI) for services recorded its biggest drop since the first outbreak of Covid-19 in Wuhan in February 2020.

Caixin’s manufacturing PMI also contracted at the fastest rate in two years. Deteriorating economic conditions were also reflected in official PMI data.

April data could be even worse, economists have warned, as lockdowns continue harm domestic demand.

“After several rounds of shutdowns, many people are burnt out, unemployed or underemployed, and have depleted their savings to a level where they now need to cut spending,” Lu of Nomura said.

Training effects

The crisis in China is also a problem for the world.

The World Bank has called China’s slowdown one of the biggest shocks facing Asian economies this year, along with the war in Ukraine and rate hikes by the Fed.

The situation in Shanghai, which has the world’s largest container port, has worsened shipping delays, putting more pressure on global supply chains. Although Chinese authorities have said the port of Shanghai remains operational, industry data showed last week that the number of ships awaiting loading or unloading had soared to a record high.

“The closures are affecting supply chains from many angles, including factory closures, port slowdowns and truck driver shortages,” said Zvi Schreiber, CEO of Hong-based freight booking platform Freightos. Kong.

Why the global supply chain mess is getting worse

This could cause “additional inflationary pressures” on goods imported from China.

Air freight rates are also increasing. All passenger flights to Shanghai, one of the busiest airports in the world, have been canceled. Schreiber said air freight rates between Shanghai and northern Europe jumped 43% in the past week from pre-outbreak levels.

Factory closures in Shanghai and neighboring cities could worsen disruptions to key electronics and automotive supply chains.

For example, Kunshan-based Unimicron Technology supplies circuit boards to customers such as Apple, while Eson Precision is a subsidiary of Foxconn, which makes iPhones. Eson Precision also supplies components to Tesla.

“It is very likely that given the severity of the current outbreak in China, the electronics and automotive supply chains will experience significant disruption due to supplier outages within 7-10 days from coming,” said Julie Gerdeman, CEO of supply chain analytics firm Everstream.

— CNN’s Beijing bureau contributed to this report.

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