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.
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.
“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.
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.
“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.
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.
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 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.
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.