The biggest risk to the global economy that no one is talking about
Nearly 400 million people in 45 cities in China have been completely or partially shut down as part of China’s strict zero-COVID policy.
Analysts are ringing warning bells but say investors are miscalculating how severe the global economic impact of these prolonged isolation orders could be.
Watch the video above to learn more about the desperate situation in Shanghai.
Watch the latest news on Channel 7 or stream for free on 7plus >>
According to data from Nomura Holdings, the 45 Chinese cities in lockdown represent 40 percent, or $7.2 trillion, of the annual gross domestic product for the world’s second-largest economy.
“Global markets may still be underestimating the impact as much attention continues to be focused on the conflict between Russia and Ukraine and the U.S. Federal Reserve’s rate hikes,” Lu Ting and colleagues, Nomura’s chief economist in China, wrote in a statement last week. Note.
Most troubling is the unrestricted lockdown in Shanghai, a city of 25 million people and one of China’s major manufacturing and export hubs.
The quarantines there have led to food shortages, the inability to access medical care, and even the killing of pets.
Nearly 400 million people in 45 cities in China have been completely or partially shut down as part of China’s strict zero-COVID policy. Credit: A.P.
They have also left the largest port in the world understaffed.
The port of Shanghai, which handled more than 20 percent of Chinese freight traffic in 2021, is virtually at a standstill.
Food supplies trapped in shipping containers with no access to refrigeration are rotting.
Inbound freight is now stuck at Shanghai’s maritime terminals for an average of eight days before being shipped elsewhere, a 75 percent increase since the recent lockdowns began.
Workers in PPE unload groceries from a truck before distributing them to residents on April 5, 2022, under the COVID-19 lockdown in Shanghai. Credit: NHG/AP
Storage time for exports has decreased, but that’s probably because new containers aren’t being sent from warehouses to the docks, according to the supply chain visibility platform project44.
Cargo carriers have canceled all flights to and from the city, and more than 90 percent of trucks supporting import and export deliveries are currently out of action.
Exports on idle
Shanghai produces 6 percent of China’s exports, according to the government’s 2021 statistical yearbook, and factory closures in and around the city are further tightening supply chains.
The factories of Sony and Apple suppliers in and around Shanghai are at a standstill.
Quanta, the world’s largest contract notebook manufacturer and a MacBook maker, has completely halted production.
The factory 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 daily.
Tesla’s Giga factory in Shanghai has halted production and previously produced about 2,000 electric cars per day. Credit: Geng Yu/AP
On Friday, China’s Ministry of Industry and Information Technology said it had sent a task force to Shanghai to work on a plan to resume production at 666 key manufacturers in the locked-down city.
Tesla executives hope to reopen their doors on Monday, ending the factory’s longest hiatus since it opened in 2019.
According to material reviewed by Reuters, the automaker has lost more than 50,000 production units so far.
“The impact on China is huge, and the knock-on effects on the global economy are quite significant,” said Michael Hirson, the head of the Eurasia Group for China and Northeast Asia.
“We’ll see more volatility and economic and social disruption in the next six months.”
The prolonged disruptions to China’s manufacturing and shipping could help accelerate an important initiative by the Biden administration to reduce U.S. reliance on Chinese products and supply chains.
But the task has serious immediate economic consequences.
In a report released last week, the World Trade Organization warned of a worst-case scenario where the decoupling of world economies, spurred by Russia’s invasion of Ukraine, could reduce global GDP by 5 percent in the long run.
That is highly unlikely, given the deep financial ties between China and the U.S.
According to Rhodium Group data, investments in each other’s stocks and bonds were $3.3 trillion at the end of 2020.
“These are still very intertwined economies,” Hirson said.
“That integrationcannotn be easily undone because it would be incredibly expensive for the U.S. and the global economy.”
Still, U.S. economic leaders believe the decoupling is already underway. In late March, Oaktree co-founder Howard Marks wrote that “the pendulum (has) returned to local sourcing” and away from globalization.
Economic target unlikely
Blackrock chairman Larry Fink echoed the sentiment in a letter to company shareholders.
“The Russian invasion of Ukraine,” he wrote, “has ended the globalization we have witnessed over the past three decades.”
Speaking to the Atlantic Council last week, Treasury Secretary Janet Yellen said the U.S.closely monitorsg China’s political and economic ties with Russia.
“In the future, it will become increasingly difficult to separate economic issues from broader national interest considerations, including national security,” she said.
While she said, she hopes a “bipolar rift” between China and the U.S. can be avoided.
“The world’s attitude toward China and its willingness to embrace further economic integration may be influenced by China’s response to our call for decisive action against Russia.”
A third of China, meanwhile, is stuck in quarantine, and its economy is suffering.
A worker carried a box of supplies at a makeshift hospital in Shanghai on April 15, 2022. Credit: Yang Youzong/AP
According to research from the Chinese University of Hong Kong, 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.
Analysts no longer believe China’s target of 5.5 percent economic growth by 2022, the country’s least ambitious goal in three decades, is realistic.
The World Bank revised its estimates for China’s economic growth this week to 5 percent but noted that it could drop to 4 percent if its restrictive policies continue.
The economic burden comes at a politically precarious time.
This fall, Chinese President Xi Jinping will petition for a third term as the country’s leader, breaking the tradition of a two-term maximum.