Monday Market Musings>>> Shanghai’s Lockdown Will Most Certainly Affect the Global Economy

Picture Credit: The New Indian Express website

China, is struggling to contain its worst Covid-19 outbreak since it first emerged in Wuhan more than two years ago. Shanghai is one of 45 cities under partial or full lockdown, as the government puts into place its “zero-COVID” strategy.

The lockdowns due to the outbreak affects a quarter of the Chinese population, and as a result it affects around 40% of the economy. Shanghai is one of the biggest and most well-off cities in China-with the largest GDP of all the cities in China (4.32 trillion yuan) and the largest stock market globally. The effect of an extensive lockdown would not only have effects on the Chinese economy, which produces 9.3% of the global GDP, but also the global economy as a whole, disrupting supply chains and throwing off the progress made when recovering from the pandemic.

The Coronavirus outbreaks have disrupted the flow of the productions, forcing many businesses to suspend operations. Consumption has taken a blow, with tourism, catering and transportation services struggling to stay afloat.

The lockdown in Shanghai was extended to Kunshan on Wednesday last week. This meant that dozens of producers of crucial electronic components had to halt production. In March, unemployment in 31 major cities had increased to 6%, unemployment at ages 16-24 surged to 16%, its highest in over a year.

Picture Credit: Financial Times website

"If Shanghai continues being unable to resume work and production, from May, all tech and industrial players involving the Shanghai supply chain will completely shut down, especially the auto industry!" Richard Yu, head of Huawei's consumer and auto segment, said on WeChat, a social media platform.

As the second largest economy in the world, China accounts for more than 18% of the global economy. It contributed more than 25% to the global economic growth in 2021. Shanghai plays a major role in the Chinese economy, making up 3.8% of the country’s economy. It is obvious that China plays a significant role in the world’s supply chains and economy.

More than 70,000 foreign owned companies have offices in Shanghai. Trading has not been halted, although banks and investment firms are struggling to keep the market afloat. The Coronavirus restrictions have affected foreign manufacturers, the autos and electrical supply chains are suffering. Tesla shut down its Giga factory in Shanghai, which produces 2,000 electric cars per day, on March 28th. Volkswagen has been shut down for weeks.

Analysts are warning of the grave implications for the rest of the world due to the lockdown. Shanghai and the surrounding regions are considered among China’s biggest manufacturing hubs, relying heavily on the ports which bring in imported components and it is how finished goods are released. The port of Shanghai is the world’s busiest in terms of container traffic, making up 16.7% of China’s total container shipments in a year, it handles four times the volume handled by the Port of Los Angeles.

Picture Credit: CGTN website

The world depends a great deal on trade concerning China, goods imported either directly or indirectly from China consists of more than 20% of Japan’s total imports, Chinese components contribute to 24% of the gross value added for the manufacturing sector of Vietnam. More than 15% of U.S purchases from abroad is from China. India sources 70% of its active pharmaceutical ingredients from China. With such a heavy role in the world economy, the situation of the ports which handles approximately 10.4% of all of China’s trade with the rest of the world, is concerning. Recent reports show that Shanghai’s vehicle freight traffic has sunk during the lockdown, all the while, the congestion of vessels waiting to dock, is growing.

“Basically, everything else is not moving but is being diverted away from Shanghai to other parts of China. It’s affecting every commodity you can think of,” said Mads Ravn, executive vice-president and global head of air freight procurement at DSV (one of the world’s largest freight brokerages), “It will have a global effect on almost every trade.”

After news of Shanghai’s lockdown, fears of declining oil demand from China (the world’s biggest crude oil importer) have also emerged.

Although Chinese manufacturers have robust inventories which they are hoping will last enough to ride out the lockdowns, analysts fear it might not be enough, as the Covid-19 restrictions are expected to last until at least June. Experts predict China’s worst Covid outbreak could lead to stalling any progress made, and further add to the global inflation.

April 18th 2022 | 6:00 PM