The blockade in Shanghai and other Chinese cities poses a growing threat to the economy

Shanghai is home to China’s leading financial center and some of its largest seaports and airports. is closed for 12 days and there is no indication that it will end.

Small businesses were badly affected, shops and restaurants were forced to close. Tesla, like many Chinese and Taiwanese manufacturers, is unclear when they will be able to restart their plants. Meanwhile, delays in ports are getting worse, and air fares are rising, putting even more pressure on world trade.

Tight restrictions have dispelled any expectations that the country could weaken its zero-tolerance approach to Covid-19.

“Growing cases in Shanghai have convinced top leaders that there is no middle ground between zero Covid and life with Covid. From now on, the preferred strategy may be to close quickly,” said Larry Hu, China’s chief economist at Macquarie. a study 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 closure – raise tough questions about Beijing’s approach to the Omicron outbreak, a much more infectious variant of the original virus.

“The Omicron option is highly contagious, and it is becoming increasingly difficult for China to achieve its“ Zero Covid ”goals, while most other countries are choosing the“ live with Covid ”approach,” said Ting Lu, China’s managing director and chief economist. Nomura, wrote in a note earlier this week.

He believes that the growing number of cases in China and the escalation of closures in Shanghai and a number of other cities will stifle activity in a wide range of sectors, including personal services, travel, logistics, construction and some manufacturing.

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

Businesses are harming

Since last month, according to the latest Nomura estimates, full or partial blockades have been imposed in about 23 cities. These cities have about 193 million inhabitants combined – 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 greatly underestimate the full impact, as many other cities massively inspected area after area, and mobility was severely limited in most areas of China,” Lu said.

Tesla could not resume production in Shanghai on Monday
By Thursday, at least 40 Chinese companies had been forced to suspend operations in Shanghai and other regions, according to stock exchange documents in Shanghai, Shenzhen and Beijing.
Meanwhile, more than 90 Taiwanese companies reported that their operations in Shanghai and neighboring Kunshan have suffered closures, including PCB maker Unimicron Technology and leading bicycle maker Giant Manufacturing, according to documents on the Taiwan Stock Exchange.

Growing wounds

The World Bank and some investment banks have recently warned that the damage done to China’s economy by zero-covid policies is growing.

The World Bank on Tuesday lowered China’s growth forecast to 2022, estimating that the world’s second-largest economy will now grow 5% this year, well below last year’s 8.1%. This is also lower than China’s official target of about 5.5%.

“China’s continued zero policy against Covid against the Omicron option will damage economic activity in China and will have negative effects on the rest of the region,” the World Bank said in its latest economic update for East Asia and the Pacific. .

Goldman Sachs on Monday maintained its China growth forecast for 2022 at 4.5%, which is a full point below the official growth target. But the bank noted that the recent outbreak and blockade in Shanghai are beginning to “weigh more importantly” on economic activity in China.

Citi, meanwhile, said the Omicron wave could delay China’s GDP growth by 1 percentage point in the first quarter. The long-running Omicron wave could subtract 0.6 to 0.9 percentage points from GDP growth in the second quarter, the report said this week.

It could get worse

The blockade in Shanghai is happening at a time when the country’s economy is already experiencing problems.

Services and production were badly affected last month. The Caixin Procurement Managers Index (PMI) for Services recorded the sharpest decline since the initial Covid-19 outbreak in Wuhan in February 2020.

Caixin’s PMI production has also declined at the fastest pace in two years. Deterioration of economic conditions also affected official PMI data.

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

“After several rounds of blocking, many people are exhausted, unemployed or underemployed, and have depleted their savings to a level where they now need to cut costs,” Lou of Nomura said.

Overflow effects

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

The World Bank has called the slowdown in China one of the major upheavals facing Asian economies this year, along with the war in Ukraine and rising Fed rates.

The situation in Shanghai, home to the world’s largest container port, has led to worsening delivery delays, putting more pressure on global supply chains. Although Chinese authorities have said that the port in Shanghai remains in operation, industry data last week showed that the number of ships awaiting loading or unloading has risen to an all-time high.

“The discovery is affecting supply chains from various sides, including plant closures, slowing ports and a shortage of truck drivers,” said Zvi Schreiber, general manager of Freighttos ’cargo booking platform in Hong Kong.

Why the chaos in the global supply chain is getting worse

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

Tariffs for air transportation are also growing. All passenger flights to Shanghai, one of the busiest airports in the world, have been canceled. Schreiber said air fares between Shanghai and northern Europe rose 43% last week from pre-flash levels.

Closure of factories in Shanghai and neighboring cities could lead to disruptions in key supply chains for electronics and automobiles.

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

“It is very likely that, given the severity of the current outbreak in China, in the next 7-10 days the supply chain of electronics and automotive equipment will experience significant disruptions due to the shutdown of suppliers,” said Julie Gerdeman, CEO of Everstream.

– The Beijing bureau CNN contributed to this report.

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