China's unwavering commitment to stamping out Covid by locking down big cities such as Shanghai threatens to deal a hefty shock to its vast economy, place more strain on global supply chains and further fuel inflation.
Shanghai — home to China's leading financial center and some of its largest sea and airports — has been under lockdown for 12 days, and there's no sign of it ending.On April 6, 2022, Shanghai remains under lockdown in order to prevent coronavirus outbreaks. (Getty Images/Kyodo News) )
Shops and restaurants have been forced to close due to the severe economic downturn. Many Chinese and Taiwanese manufacturers, including Tesla, are unsure when their plants will be able to resume production. Meanwhile, port delays are increasing, and air freight charges are skyrocketing, putting even more strain on global trade.
The country's severe regulations have dashed any hopes of it changing 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.It's becoming increasingly difficult for China to achieve its 'zero-Covid' goals since the Omicron strain is highly infectious, according to Ting Lu, managing director and top China economist at Nomura, in a note published earlier this week.
As the number of instances and lockdowns rises across China, he predicts that a variety of industries, including in-person services, tourism, logistics, construction, and possibly manufacturing, would see reduced activity.
Global investors may be underestimating the impact of China's zero-Covid policy on its economy and markets, according to Lu.According to Nomura's most recent estimates, 23 localities have undertaken full or partial lockdowns since last month. More than 13.6 percent of China's population lives in these cities and they contribute 23 trillion yuan ($3.6 trillion) to the country's GDP.
There are numerous additional cities in China that have been doing mass testing by district, and mobility has been considerably limited in most of China, so these estimates may underestimate the overall effect."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 as of Thursday.
A total of more than 90 Taiwanese firms have reported being affected by the lockout in Shanghai and Kunshan, including Unimicron Technology, a leading printed circuit board manufacturer, and Giant Manufacturing, the world's top bike producer.According to the World Bank and certain investment institutions, China's zero-Covid policy is wreaking havoc on the economy.
On Tuesday, the World Bank lowered its growth prediction for China through 2022, anticipating that the country will now expand at 5% this year, substantially down from last year's 8.1%. This is also less than China's official aim of roughly 5.5 percent.
Continued zero-Covid policies in China, the World Bank warned in its recent economic analysis for East Asia and the Pacific, "would impair economic activity in China and have negative spillovers on other regions."
China's growth rate is expected to be 4.5% in 2022, according to Goldman Sachs, which is a full percentage point lower than the government's official growth target. Despite this, the bank said that China's economic activity is being affected by the recent epidemic and lockdown in Shanghai.
According to Citi, China's GDP growth could be lowered by 1% in the first quarter as a result of the Omicron wave. According to a research released this week, a protracted Omicron wave could reduce GDP growth in the second quarter by as much as 0.6 to 0.9 percentage points.At a time when China's economy is already in decline, the Shanghai lockdown is a further blow.
Last month, both services and manufacturing took a significant knock. Since the initial Covid-19 outbreak in Wuhan in February 2020, the Caixin Purchasing Managers' Index (PMI) for services has dropped to its lowest level since then.
The PMI for Caixin's manufacturing sector shrank at its fastest rate in two years as well. Official PMI figures confirmed the worsening economic situation.
Experts fear that April's numbers will be even worse because of the continuing impact of lockdowns on domestic demand.
Lu from Nomura noted that many people have exhausted their resources to the point that they now have to cut back on spending because of the several lockdowns.
Because of this, China's financial crisis is a global issue.
According to a World Bank report, China's economic downturn is one of the biggest threats to Asian economies this year.
There has been an increase in shipping delays as a result of the current scenario in Shanghai, which possesses the world's largest container port. A record number of vessels were waiting to be loaded or discharged at Shanghai port last week, according to industry data, despite assurances from Chinese authorities that the facility was still operating
Factory closures, port delays and truck driver shortages are all factors in supply chain shutdowns, according to Zvi Schreiber, CEO of Hong Kong-based freight booking platform Freightos.As a result, it could lead to "inflationary pressures" on Chinese imports.
The cost of air freight is also growing. Shanghai's busiest airport has been forced to cancel all flights to and from the city. During the week following the outbreak, Schreiber reported a 43 percent increase in air cargo rates between Shanghai and northern Europe.
Supply chain disruptions could be exacerbated by the closures of factories in Shanghai and other nearby citiesE-commerce and automobile technology.
Unimicron Technology, based in Kunshan, offers printed circuit boards to clients such as Apple, whereas Eson Precision is a Foxconn subsidiary that produces iPhones, for example. Tesla also receives components from Eson Precision.
In light of the current outbreak in China, "it is quite likely that supplier disruptions will cause major disruption in the electronics and automotive supply chains in the coming 7-10 days," said Julie Gerdeman, CEO of supply chain analytics firm Everstream.
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