Small businesses have been hit hard, with shops and restaurants being forced to close. Tesla, as well as many Chinese and Taiwanese manufacturers, are unclear when they can restart their plants. Meanwhile, port delays are worsening and air fares are soaring, putting even more pressure on world trade. Strict restrictions have shattered any expectation that the country could relax its zero-tolerance approach to Covid-19. “Rising cases in Shanghai have convinced top leaders that there is no middle ground between zero Covid and living with Covid. From now on, early lockdown could be the dominant strategy,” said Larry Hu, chief economist. for Greater China at Macquarie. a research report this week. President Xi Jinping has pledged to “minimize” the economic impact of his policy on Covid, but the deteriorating situation in Shanghai – and the widespread lockdown – raise difficult questions about Beijing’s approach to the Omicron cases, much more infectious variant of the original virus. “The Omicron variant is highly contagious and it is becoming increasingly difficult for China to achieve the ‘zero Covid’ goals, while most other countries are opting for a ‘life with Covid’ approach,” said Ting Lu, CEO and chief economist for China. Nomura, wrote in a note earlier this week. He believes China’s growing cases and escalating lockdowns in Shanghai and many other cities will stifle activity in a wide range of sectors, including personal services, travel, logistics, construction and some industries. “The economic costs can be staggering,” Lu said, adding that global investors could “underestimate” the impact of China’s zero Covid policy on the economy and markets.

Affected businesses

Full or partial lockdowns have been implemented in about 23 cities since last month, according to the latest Nomura estimates. These cities together have about 193 million inhabitants – 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 significantly underestimate the full impact, as many other cities have undergone massive district-by-region testing and mobility has been significantly reduced in most parts of China,” Lu said. As of Thursday, at least 40 Chinese companies had been forced to suspend operations in Shanghai and other areas, according to stock exchanges in Shanghai, Shenzhen and Beijing. Meanwhile, more than 90 Taiwanese companies reported that their operations in Shanghai and neighboring Kunshan City were affected by the lockdowns, including the manufacturer of printed circuit boards Unimicron Technology and the leading bicycle manufacturing company Giant Manufacturing, according to stock quotes. Taiwan.

Wounds that grow

The World Bank and some investment banks have recently warned that the damage done by China’s Covid Zero policy to the economy is growing. The World Bank cut China’s growth forecast for 2022 on Tuesday, estimating that the world’s second largest economy will now grow by 5% this year, down from 8.1% last year. This is also lower than China’s official target of about 5.5%. “Continuation of China’s zero Covid policy against the Omicron variant will hurt economic activity in China and have a negative impact on the rest of the region,” the World Bank said in its latest East Asia-Pacific economic briefing. . Goldman Sachs on Monday kept its growth forecast for China at 2022 at 4.5%, a full point below the official growth target. However, the bank noted that the recent outbreak and lockdown in Shanghai are beginning to “burden” more economic activity in China. Citi, meanwhile, said the Omicron wave could slow China’s GDP growth by 1 percentage point in the first quarter. A prolonged Omicron wave could subtract between 0.6 and 0.9 percentage points of GDP growth in the second quarter, according to 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 production were hit hard last month. The Caixin Procurement Index (PMI) for services recorded the largest drop since the initial Covid-19 epidemic in Wuhan in February 2020. Caixin’s PMI also shrank at the fastest pace in two years. The deterioration of economic conditions was also reflected in the official PMI data. April data could be even worse, economists warned, as lockdowns continue to hurt domestic demand. “After several rounds of lockdown, many people are worn out, unemployed or underemployed and have exhausted their savings to a level where they now have to cut costs,” said Lu from Nomura.

spillover effect

The crisis in China is also a problem for the world. The World Bank has described China’s slowdown as one of the biggest shocks to Asian economies this year, along with the war in Ukraine and interest rate hikes by the Fed. The situation in Shanghai, which has the world’s largest container port, has exacerbated shipping delays, putting more pressure on global supply chains. Although Chinese authorities said the port of Shanghai remained in operation, industry figures showed last week that the number of ships waiting to be loaded or unloaded had skyrocketed to an all-time high. “Outages affect supply chains from many angles, including factory shutdowns, slowing down ports and shortages of truck drivers,” said Zvi Schreiber, CEO of Freighton-based Freightos booking platform. It could put “extra inflationary pressure” on goods imported from China. Air transport prices are also rising. All passenger flights to Shanghai, one of the busiest airports in the world, have been canceled. Schreiber said air cargo rates between Shanghai and northern Europe rose 43% last week from pre-epidemic levels.
The closure of factories in Shanghai and neighboring cities could add problems to key supply chains for electronics and cars. For example, Kunshan-based Unimicron Technology supplies printed circuit boards to customers such as Apple, while Eson Precision is a subsidiary of Foxconn, which makes the iPhone. Eson Precision also supplies parts to Tesla. “Given the severity of the current epidemic in China, it is very likely that the electronics and car supply chains will experience significant downtime due to a supplier break in the next 7-10 days,” said Julie Gerdeman, CEO of Supply Chain Analysis. – CNN’s Beijing office contributed to this report.