Shanghai – home to China’s leading financial center and some of its largest seaports and airports – has been locked for 12 days and there is no sign of it ending.
Small businesses have been hit hard, with shops and restaurants closing. Tesla, along with many Chinese and Taiwanese manufacturers, are unsure when they will be able to restart their factories. Meanwhile, delays in ports are getting worse and air freight rates are soaring, putting even more pressure on global trade.
The severe restrictions have shattered any expectations that the country could ease its zero-tolerance approach to Covid-19.
“The rising number of cases in Shanghai has convinced leaders that there is no middle ground between zero Covid and living with Covid. From now on, an immediate lockdown could be the dominant strategy,” said Larry Hu, chief economist for Greater China at Macquarie, in a research paper this week.
President Xi Jinping has vowed to “minimize” the economic impact of his Covid policies, but the worsening situation in Shanghai — and the extended lockdown — raises tough questions about Beijing’s handling of outbreaks of Omicron, a much more contagious variant of the original virus .
“The Omicron variant is highly contagious and it is becoming 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 China’s rising cases and escalating lockdowns in Shanghai and several other cities will stifle activity in a variety of sectors, including personal services, travel, logistics, construction and some manufacturing.
“The economic cost could be staggering,” Lu said, He added that global investors may be “underestimating” the impact of China’s zero-Covid policy on its economy and markets.
companies suffer
Full or partial lockdowns have been implemented in about 23 cities since last month, 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) of GDP — 22% of the country’s economy.
“These numbers could greatly underestimate the full impact, given that many other cities have been conducting mass testing district by district and mobility has been severely restricted in most parts of China,” Lu said.
As of Thursday, at least 40 Chinese companies have been forced to halt operations in Shanghai and other regions, according to stock market reports in Shanghai, Shenzhen and Beijing. Meanwhile, more than 90 Taiwanese companies have reported that their operations in Shanghai and the neighboring city of Kunshan have been affected by the lockdowns, including circuit board maker Unimicron Technology and leading bicycle maker Giant Manufacturing, according to filings filed with the Taiwan Stock Exchange.
Growing Wounds
The World Bank and some investment banks have recently warned that the damage China’s zero-Covid policy is causing to the economy is growing.
The World Bank on Tuesday lowered China’s growth forecast for 2022, estimating that the world’s second-biggest economy will now grow 5% this year, a sharp drop from last year’s 8.1%. That’s also less than China’s official target of about 5.5%.
“The continuation of China’s zero-Covid policy in the face of the Omicron variant will hamper economic activity in China and have a negative impact on the rest of the region,” the World Bank said in its latest East Asia and Pacific Region Economic Update.
Goldman Sachs on Monday kept its growth forecast for China for 2022 at 4.5%, a full point below the official growth target. However, the bank cautioned that the recent outbreak and lockdown in Shanghai is “taking a heavier toll” on economic activity in China.
Citi, meanwhile, has said the Omicron wave could drag China’s first-quarter GDP growth down 1 percentage point. A longer Omicron wave could subtract between 0.6 and 0.9 percentage points from second-quarter GDP growth, it estimated in a report this week.
It could get worse
The lockdown in Shanghai comes at a time when the country’s economy is already struggling.
Services and manufacturing have both been hit hard over the past month. The Caixin Services Purchasing Managers’ Index (PMI) fell the sharpest since Wuhan’s first Covid-19 outbreak in February 2020.
The Caixin Manufacturing Purchasing Managers’ Index also shrank at its fastest pace in two years. The deterioration in the economic environment also had an impact official PMI data.
April data could be even worse, economists have warned, as lockdowns continue harming domestic demand.
“After several rounds of lockdown, many people are exhausted, unemployed or underemployed, and have drained their savings to a level where they now have to cut spending,” Nomura’s Lu said.
spillover effects
The crisis in China is also a problem for the world.
The World Bank called China’s slowdown one of the biggest shocks to Asian economies this year, along with the war in Ukraine and the Fed’s rate hikes.
The situation in Shanghai, which has the world’s largest container port, has caused shipping delays and put more pressure on global supply chains. Although Chinese authorities said the port of Shanghai remains operational, industry data last week showed the number of ships waiting to be loaded or unloaded rose to an all-time high.
“Shutdowns are impacting supply chains from many angles, including factory closures, port slowdowns and truck driver shortages,” said Zvi Schreiber, CEO of Hong Kong-based freight booking platform Freightos.
It could put “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 cancelled. Schreiber said air freight rates between Shanghai and northern Europe rose 43% last week from pre-outbreak levels.
Plant closures in Shanghai and neighboring cities could compound disruptions to key electronics and automotive supply chains.
For example, Kunshan-based Unimicron Technology supplies circuit boards to customers like Apple, while Eson Precision is a Foxconn subsidiary that makes iPhones. Eson Precision also supplies components to Tesla.
“Given the severity of the current outbreak in China, it is highly likely that the electronics and automotive supply chains will face significant disruption over the next 7 to 10 days due to supplier outages,” said Julie Gerdeman, CEO of supply chain analytics firm Everstream.
– CNN’s Beijing office contributed to this report.