With no sign that the Chinese government is ready to ease the restrictions anytime soon, there is growing concern about the financial damage they are causing and the shockwaves that will send an extended lockdown around the world. Shanghai is the epicenter of the current Covid epidemic, but it’s not the only one – Nomura analysts estimate that there are full or partial lockdowns in 45 Chinese cities, affecting a quarter of the population and about 40% of the economy. Prime Minister Li Keqiang on Monday warned for the third time in a week about the threat posed by Covid’s rise to the Chinese economy. Here are three reasons why the rest of the world should watch Shanghai closely.
Business and finance
It has the largest GDP of all Chinese cities – 4.32 trillion yuan ($ 679 billion), the third largest stock exchange in the world by the value of companies trading there and the fifth largest number of billionaires in the world. Shanghai is also the most attractive destination for international business looking forward to its presence in mainland China. By the end of 2021, more than 800 multinational companies had set up regional or national headquarters in Shanghai, according to city officials. Of these, 121 are Fortune Global 500 companies, including Apple (AAPL), Qualcomm (QCOM), General Motors (GM), Pepsico (PEP) and Tyson Foods (TSN). More than 70,000 foreign companies have offices in the city, more than 24,000 of which are Japanese companies, according to Japanese government figures. With a total market capitalization of $ 7.3 trillion, the Shanghai Stock Exchange – founded in 1990 – is second only to New York and London. Trading continues despite the lockdown, but some banks and investment companies require staff to sleep next to their offices to keep the market afloat. All of Shanghai-listed companies focus heavily on large, state-owned enterprises that play a central role in the Chinese economy. They include the most valuable alcoholic beverage company Kweichow Moutai, banking and insurance giants such as ICBC and China Life Insurance (LFC) and the state oil company PetroChina (PCCYF). The Shanghai Stock Exchange is also hosting China’s response to the Nasdaq – the Star Market.
Trade and logistics
Shanghai accounts for 3.8% of China’s GDP. But it has a much higher share – 10.4% – in China’s trade with the rest of the world, according to official statistics for last year. Shanghai Port is the busiest container world in the world. It moved 47 million equivalent 20-foot cargo units in 2021, four times the volume of the Los Angeles port. That accounted for 16.7% of China’s total container shipments last year. Shanghai is also an important air hub in Asia. The city’s airports – Pudong International Airport and Hongqiao Airport – handled 122 million passengers in 2019, making the city the fourth busiest hub in the world after London, New York and Tokyo. However, the Covid outbreak has exacerbated port delays and forced the suspension of many passenger flights, boosting air fares and putting even more pressure on global supply chains. The Shanghai port remains in operation, but industry data released in late March showed that the number of ships waiting to be loaded or unloaded had skyrocketed. State media also reported that many truck drivers found it difficult to carry containers in and out of port on time due to travel restrictions.
Construction and technology
The greater Shanghai area, which includes Kunshan and many other eastern cities, is a major hub for industries ranging from automobiles to semiconductors. Volkswagen (VLKAF) and General Motors have factories in Shanghai in partnership with state-owned automaker SAIC Motor. Shanghai is also home to Tesla’s first giant plant (TSLA) in Asia. The US electric vehicle maker delivered more than 65,000 cars from its Shanghai plant last month, making it the best-selling EV brand in China. In January, Ford inaugurated its sixth global design center in Shanghai, highlighting the vibrancy of the city and the growing number of young Chinese designers with a mix of “fresh thinking, local knowledge and global perspective”. TSMC (TSM), the world’s largest contract chip maker, operates a large semiconductor plant in Songjiang suburbs. Leading Chinese chipmakers SMIC (SMICY) and Hua Hong Semiconductor have factories in Pudong, east of the city. However, Covid restrictions have forced many factories to suspend operations in Shanghai and Kunshan, threatening to disrupt key supply chains for cars and electronics. The Volkswagen and Tesla plants in Shanghai have been closed for weeks. Chinese electric vehicle maker Nio has also been forced to suspend production due to Covid-related disruptions in Shanghai and other Chinese cities. Pegatron, a key Apple supplier (AAPL), has suspended production at its Shanghai and Kunshan plants until further notice. In addition, Taiwan’s Unimicron Technology, which supplies printed circuit boards to Apple, and Eson Precision, a subsidiary of iPhone supplier Foxconn, which also supplies parts to Telsa, stopped production at their Kunshan plant earlier this month. “With Shanghai’s significant trade links with East Asia, this could have a secondary impact on regional supply chains,” Citi analysts said in a research note late last week. “We believe that Korea, Taiwan, Vietnam and, to a lesser extent, Japan (in vehicles) seem relatively exposed [to the disruptions],” they said. Other industries include pharmaceuticals. In October, AstraZeneca (AZN) opened a global R&D center in Shanghai.
