Will China’s covid lockdowns add to strains on supply chains?


WHEN CHINA’S government said on March 5th that it would aim for economic growth of 5.5% this year, the target looked demanding. Now it looks almost fanciful. On March 14th China recorded 5,370 new cases of covid-19. That would be a negligible number in many countries. But in China, where vaccination rates among the elderly are still worryingly low, it is an intolerable threat to its cherished zero-covid policy. The bulk of the cases are in the north-eastern province of Jilin, which has entered into a full lockdown. But lockdowns of varying severity have also been imposed in Shanghai and Shenzhen, two cities that account for more than 16% of China’s exports.

In Shanghai, anyone wanting to leave the city has to show a negative result on a nucleic-acid test taken in the previous 48 hours. Parks, entertainment venues and schools for younger children have been closed. Many flights and buses into and out of the city have been cancelled. And entire blocks of flats have been locked down if anyone living in them is suspected of exposure to the virus.

The restrictions in Shenzhen, a southern city of over 17m people, go further. Subway and bus services have been suspended until March 20th. Housing estates and industrial parks have been sealed off. The owner of a barbecue shop was fined for letting people into his sealed-off “urban village” through his shop’s back door, according to the Shenzhen Daily. People have been allowed to stock up on groceries, but must now stay home for a week while they undergo three rounds of compulsory tests. Everyone must work from home or not at all, unless they help supply essential goods and services, like food and sanitation, to the city or to Hong Kong next door.

The lockdowns pose an obvious threat to the world’s supply chains. Shenzhen (the name of which can be translated loosely as “deep ditch”) accounts for almost 16% of China’s high-tech exports. Foxconn, which makes iPhones for Apple, has suspended operations at its plants in the area for at least the first half of the week, according to Reuters. Other links in the tech supply chain, such as Unimicron Technology, which makes printed circuit boards, have also paused production. And in the Huaqiangbei neighbourhood of Shenzhen, the wholesale electronics markets, landmarks of “low-end globalisation”, bustle no more.

Shenzhen is also home to Yantian port, one of the world’s busiest, which in a good month can handle over 1.4m containerfuls of electronics, furniture, car parts and the like. After a covid outbreak in May last year, it had to operate briefly at only 30% of its capacity. That contributed to long queues of ships out at sea and high towers of containers on the docks. The latest lockdowns will “cause a surge in already inflated shipping prices,” warns Johannes Schlingmeier, head of Container xChange, a platform for leasing containers. “The shockwaves will be felt across America…and almost everywhere in the world.”

The waves might even reach the Federal Reserve. Economists in America worry that China’s shutdowns will further complicate the Fed’s fight against inflation, which rose to 7.9% in February, compared with a year earlier, the highest rate in 40 years. Writing in the Wall Street Journal earlier this year, Jason Furman of Harvard University feared “we could get the worst of all worlds as strong US demand pushes against fraying global supply chains.”

A worst world is possible. But China’s supply chain is still some way from snapping. Foxconn, for example, has some room for manoeuvre. It has over 40 plants in China and does much of its iPhone production outside Shenzhen. March is also not a peak delivery season for many of the things Shenzhen makes, point out Helen Qiao of Bank of America and colleagues.

China’s manufacturers will go to considerable lengths to keep production going. In Shanghai, for example, a car-parts maker has asked essential workers to live and sleep on the factory premises when conditions allow, according to LatePost, a Chinese media outlet. The government will allow some factories to operate in this kind of bubble in Shenzhen, too.

The more certain economic threat posed by the latest Omicron outbreak is to Chinese consumption. The country’s retail sales had recently shown welcome signs of life: they rose by 4.9% (adjusted for inflation) in January and February, compared with the same two months a year earlier. But lockdowns will bring this recovery to a halt, preventing people from consuming “tactile” services in particular. Nomura, a bank, thinks retail sales, in real terms, could shrink again in the months ahead.

The outbreak has also delayed any potential relaxation of China’s zero-covid policy. In recent weeks, there had been some signs of a softening. Prominent public-health experts had begun to talk about a path to coexistence with the virus and the need for a cost-effective response. The government approved rapid-antigen tests that people can use themselves, leading to speculation that they might be allowed to quarantine at home instead of in government facilities. And China Meheco, a state-owned firm, this month signed a deal with Pfizer, a pharmaceutical giant, to supply its Paxlovid pill, which helps protect infected people against serious disease.

But the latest outbreak has been met with more hawkish rhetoric. On a visit to Jilin on March 13th Sun Chunlan, one of the country’s four deputy prime ministers, said China’s provinces should follow their zero-covid strategy without compromise.

That relentlessness may, however, oblige China to compromise on some of its other goals. Morgan Stanley, another bank, has cut its forecast for economic growth this year from 5.3% to 5.1%. It thinks GDP may not grow at all in the first quarter, compared with the previous three months. The economy may yet rebound later in the year. It has done so before. But if China is to come close to its growth target, it will first have to clamber out of its ditch.

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