As part of China’s strict zero-COVID policy, about 400 million people in 45 cities in China are under complete or partial lockdown.
Analysts are sounding warning bells, but say investors are not properly assessing how severe the global economic fallout from these prolonged isolation orders could be.
Watch the video above to learn more about the hopeless situation in Shanghai
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The 45 Chinese cities in lockdown represent 40 percent of annual GDP, or $7.2 trillion, for the world’s second-largest economy, according to data from Nomura Holdings.
“Global markets may still be underestimating the impact, as the Russian-Ukraine conflict and the US Federal Reserve focus more on rate hikes,” Nomura’s chief China economist Lu Ting and his colleagues wrote in a note last week. Has gone.”
The indefinite lockdown in Shanghai, a city of 25 million and one of China’s premiere manufacturing and export hubs, is at its worst.
Quarantines there have reported food shortages, inability to access medical care, and even the killing of pets.
They have also left the world’s largest port to the workforce.
The Port of Shanghai, which handled more than 20 percent of Chinese freight traffic in 2021, is essentially at a standstill.
Food supplies stuck in shipping containers without refrigeration are rotting.
Incoming cargo is now stuck at Shanghai’s sea terminals for an average of eight days before it has to be moved elsewhere, a 75 percent increase since the start of the most recent lockdown period.
Export storage times have fallen, but likely because no new containers are being shipped from warehouses to docks, according to Project 44, a supply chain visibility platform.
Cargo airlines have canceled all flights in and out of the city, and more than 90 percent of trucks supporting import and export deliveries are currently out of action.
export on idle
Shanghai produces 6 percent of China’s exports, according to the government’s statistical annuity for 2021, and factory closures in and around the city have further accelerated the supply chain.
Sony and Apple’s supplier plants are inactive in and around Shanghai.
Quanta, the world’s largest contract notebook maker and MacBook maker, has stopped production completely.
The plant accounts for about 20 percent of Quanta’s notebook production capacity, and the company previously estimated it would ship 72 million units this year.
Tesla has closed its Shanghai Giga factory, which produces about 2,000 electric cars a day.
On Friday, China’s Ministry of Industry and Information Technology said in a statement that it had sent a task force to Shanghai to work on a plan to restart production at 666 major manufacturers in the shuttered city.
Tesla executives expect they will be allowed to reopen their doors by Monday, ending the factory’s longest pause since its 2019 opening.
The automaker has lost over 50,000 units of production so far, according to materials reviewed by Reuters,
“The impact on China is major and the impact on the global economy is significant,” said Michael Hirsson, Eurasia Group’s exercise chief for China and Northeast Asia.
“I think we are in for more volatility and economic and social disruption for at least the next six months.”
Prolonged disruptions in Chinese manufacturing and shipping could help accelerate a major Biden administration initiative aimed at reducing US dependence on Chinese products and supply chains.
But the act comes with serious immediate economic repercussions.
In a report released last week, the World Trade Organization warned a worst-case scenario involving global economies, prompted by Russia’s invasion of Ukraine, could shrink long-term global GDP by up to 5 percent.
Given the deep financial ties between China and the US, this is highly unlikely.
According to data from the Rhodium Group, investments in each other’s stocks and bonds reached $3.3 trillion at the end of 2020.
“These are still very interconnected economies,” Hirson said.
“This integration is not something that is easily reversed because it would be incredibly costly for the US and the global economy.”
Still, US economic leaders believe that decoupling is already underway. Oaktree co-founder Howard Marks wrote in late March that “the pendulum is back (towards local sourcing)” and away from globalization.
no economic target
BlackRock chairman Larry Fink echoed this sentiment in a letter to the company’s shareholders.
“The Russian invasion of Ukraine,” he wrote, “ends the globalization we have experienced over the past three decades.”
In a speech to the Atlantic Council last week, Treasury Secretary Janet Yellen said the US was closely watching China’s political and economic ties with Russia.
“Going forward, it will be difficult to separate economic issues from broader considerations of national interest, including national security,” she said.
While he said he hoped the “bipolar divide” between China and the US could be avoided.
“The world’s attitude toward China and its willingness to embrace further economic integration may well be influenced by China’s response to resolute action on Russia.”
Meanwhile, a third of China is in quarantine and its economy is suffering.
China’s recent pandemic response is likely to cost at least $46 billion in lost economic output per month, or 3.1 percent of GDP, according to research from the Chinese University of Hong Kong.
Analysts no longer believe that China’s 2022 economic growth target of 5.5 percent, the country’s least ambitious target in three decades, is realistic.
The World Bank this week revised its forecast for Chinese economic growth to 5 percent, but noted it could fall to 4 percent if its restrictive policies continue.
Economic burdens come at a politically uncertain moment.
This fall, Chinese President Xi Jinping will petition for a third term as the nation’s leader, breaking the tradition of a two-term maximum.