The Next Variant:

At a time when most countries are opening their borders and loosening COVID-19 restrictions, China is battling its worse wave since the virus first appeared two years ago in Wuhan and has imposed various lockdown measures in Shanghai and other Chinese cities. China has adopted stringent pandemic measures including its "zero COVID" policy, which involves isolating those infected with the virus and shutting down cities where COVID-19 is spreading. It seems unlikely that China will give up this approach, no matter how economically costly it might become.

After Shanghai recorded around 4,500 new cases of COVID-19, setting a new record for the city, officials decided to impose a lockdown on Shanghai’s more than 26 million people. Although China is fully aware of the city’s economic importance both domestically and globally, it has continued to keep Shanghai under lockdown in order to contain the virus. However, lockdown has brought this usually bustling financial hub to a standstill, raising questions about the negative economic repercussions of the shutdown for China and the world.

A Critical Hub

Despite Shanghai’s pivotal role in the Chinese and global economy, it has been subject to stringent COVID-19 containment policies imposed by the Chinese government. The economic importance of the city is due to the following factors:

1. Foothold for Multinational Corporations: Multinational corporations opened 60 new regional offices in Shanghai during 2021, bringing the total number registered in the city to 831, according to a statement by Shanghai’s mayor, Gong Zheng, at the beginning of the year. There were also approximately 506 foreign-funded think tanks, with another 25 think tanks opened in 2021. The volume of foreign capital used in Shanghai grew to 22.55 million USD in 2021, an increase of 11.5 percent from the previous year.

2. Hub for Semiconductors and Electronics: In addition to being a key city for the finance industry, Shanghai is also a hub for semiconductor, electronics, and automobile manufacturing. The city is home to two of the largest companies in China, the Semiconductor Manufacturing International Corporation (SMIC) and Shanghai Huahong Grace Semiconductor Manufacturing, which together make up 20 percent of the city’s GDP. There are also 1150 major artificial intelligence companies in Shanghai, according to a document available on the city of Shanghai’s website.

3. Busiest Container Port in the World: The Port of Shanghai, which is located in the eastern part of the city, is one of the busiest container ports in the world. Shanghai’s port processed four times the cargo volume of that of the Port of Los Angeles in 2021, according to data issued by port authorities in both cities. Shanghai is also a global provider of cargo manifests and processes 140,000 cargo containers daily.

According to Vessels Value, the number of ships waiting to be loaded or unloaded in the Port of Shanghai since the beginning of the lockdown has now reached 300 ships—more than five times the number waiting last year. This is expected to pose a serious threat to local and global industry and business if COVID-19 restrictions continue to disrupt activity in the Port of Shanghai.

Ramifications for China

The severe lockdown of Shanghai has increased pressure on global supply chains and produced significant delays for the city’s port. This will lead to various negative ramifications for the Chinese economy, including:

1. Decreased Consumer Spending: Given the linkages between the city of Shanghai and other areas of China, particularly manufacturing hubs in the Yangtze river delta, the lockdown in Shanghai will result in reduced consumer spending. This has already begun to happen at the local level in Shanghai, which was known for luxury storefronts like Gucci and Louis Vuitton. Losses for local retail, hotel, and restaurant industries in Shanghai as a result of the lockdown are estimated at 3.7 percent of the city’s annual GDP.

2. Negative Impacts on GDP: GDP is a key indicator of a country’s economic health, and therefore the fact that lockdown is affecting China’s GDP is a very concerning sign of problems in the Chinese economy as a whole. Although the Chinese government has set ambitious goals for expanding the national GDP by 5.5 percent in 2022, its continued adherence to a "zero-COVID" policy could reduce growth by up to 10 percent in the first quarter of this year.

3. A Sluggish Service Sector: In March, the Caixin services purchasing managers’ index fell to 42, its largest drop since the beginning of the pandemic. Other data also indicate that there has been a slowdown in the service and manufacturing sectors in China in April. It is likely that the service sector will experience significantly more long-term rather than short-term pressures as a result of the lockdown, given uncertainty about how long the current situation is likely to continue, or whether it could regularly reoccur whenever positive cases increase in the city.

4. Decrease in Shipping Indices: The express delivery index for express mail services was down about 27 percent in early April from its level at the same time last year. Meanwhile, the ground freight shipping index fell 12.8 percent, which is a particularly worrisome drop. Even if this is only a temporary decrease, it could have implications for the Chinese economy as a whole in the long term.

5. Extensive Factory Closures: Many factories in Shanghai have been temporarily closed as a result of the shutdown in the city. The authorities have tried to prevent production delays by creating "closed-circuit" systems that enabled some factories to stay open as long as workers stayed within the factory perimeter and adhered to COVID-19 testing protocols. However, the huge Tesla factory in Shanghai was forced to halt its assembly lines after the Chinese authorities asked the factory to shut down from Monday, 28 March, to the following Thursday, 3 April. This led to temporary losses in the factory’s daily production totaling 2,000 cars.

Global Repercussions

The lockdown in Shanghai has caused various problems for global supply chains, and by extension, the global economy, which can be summarized as follows:

1. Problems for Global Shipping Industry: Supply chain disruptions have affected the global transport industry, especially freight transport. Freight transport plays an importance role in moving goods between Chinese cities and major world ports. These problems are due to the fact that drivers are now subject to stringent regulations, which results in disruptions in delivery operations when positive cases arise. Furthermore, air freight has also been significantly disrupted. According to Mads Ravn, the executive vice president and global head of air freight procurement for DSV, one of the largest freight transport companies in the world, shipping has been nearly impossible since the beginning of the lockdown in Shanghai.

Flights through the Shanghai Pudong International Airport fell to only 3 percent of usual flight numbers in March, while air freight has been limited to basic commodities such as medicines. This has led some analysts to warn that any logistical challenges at the domestic level could ultimately lead to delayed shipments overseas due to the backlogs of goods and orders. The negative ramifications of this are likely to become clearer as the lockdown is lifted.

2. Uncertainty for Global Markets: The shutdown of most activities in the most populous Chinese cities has shaken global financial markets, which were already uneasy due to the Russian war on Ukraine, rising US interest rates, and the Chinese economic slowdown. On 31 March, the FTSE 100 Index in London, one of the most important British stock indices fell less than 0.1 percent to 7575.04, while the CAC 40 (one of the most important Paris stock market indices for the top forty French companies) was down less than 0.1 percent to 6743.19. This was caused by falling production levels in China as a result of the lockdown in Shanghai.

3. Volatile Oil Prices: After news of Shanghai’s lockdown broke, the price of oil fell 8 percent on Monday 4 April. There were fears of reduced demand for oil in China, the largest importer of crude oil in the world. Oil prices then fell for the second consecutive week, despite recovering somewhat after some countries announced plans to release crude oil from strategic reserves, which led Brent crude oil futures to increase 71 cents (0.7 percent) to 101.29 USD per barrel. The price of West Texas Intermediate futures went up by 85 cents (0.9 percent) to 96.88 USD per barrel on 9 April.

Stimulus Efforts

In sum, given the economic importance of Shanghai for China and the world, the city’s lockdown has had far-reaching consequences, despite efforts by China’s ruling party to modify its strategy and mitigate these repercussions. For example, the government of Shanghai announced tax refunds, reduced rents, and lower-cost loans for small businesses.

Furthermore, the People’s Bank of China has pledged to offer an economic stimulus package and announced that it intends to ramp up its monetary policy in order to increase business confidence. It remains to be seen whether the measures adopted by Chinese policymakers will be sufficient to stimulate the economy, given that China lacks sufficient liquidity to avoid an economic downturn. The indirect economic consequences of the lockdown, even after it is lifted, loom large for both Chinese and global economic prospects.