- While the lockdown of Shanghai has been making headlines, yesterday, dozens of manufacturers of crucial electronic components in cities surrounding China’s financial center, halted production as lockdown rules spilled over to neighboring industrial cities.
- There is growing pressure on trade, with imports into China falling on a year-on-year basis for the first time since August 2020.
What happens when the factory to the world catches Covid? We’re about to find out as Chinese President Xi Jinping sticks to his dogged determination to deploy a zero-Covid policy that’s fomenting unrest in some of China’s largest cities even as it cripples supply chains.
Watching from the outside looking in, China looks like a slow-moving train wreck, from its crackdown on its once vaunted tech companies to its now struggling real estate sector, everywhere global investors look in China there are more risks than opportunities.
And now, add to the list the world’s largest electronics manufacturing hubs surrounding Shanghai being ground to a halt, and China’s economic woes looks longer than a 5-year-old’s Christmas wish list.
While the lockdown of Shanghai has been making headlines, yesterday, dozens of manufacturers of crucial electronic components in cities surrounding China’s financial center, halted production as lockdown rules spilled over to neighboring industrial cities.
The latest round of production disruptions in China’s major manufacturing hubs are raising risks for China’s rapidly slowing economy and even at the very pinnacle of China’s leadership, there are signs that not everyone agrees with Xi’s zero-Covid policies.
On Monday, Chinese Premier Li Keqiang warned for the third time in a week of the dangers that pandemic control measures posed to the Chinese economy, in stark contrast to Xi’s insistence that zero-Covid was the correct path forward.
According to the state-owned Xinhua News Agency, Xi said in a trip to Hainan with respect to Covid
“Prevention and control work cannot be relaxed.”
But Xi’s bold gamble as he seeks an unprecedented third term in office as China’s leader could have long-term consequences for the Chinese economy.
Beijing has stubbornly refused to import mRNA vaccines, which have been proved to be more effective against the most severe effects of Covid and strict measures have meant that there have been limited opportunities for herd immunity to develop in China.
Economists at Nomura estimate that as many as 45 cities with some 373 million people in China were under some form of lockdown, a sharp increase from 23 cities and 193 million people just a week ago.
There is growing pressure on trade, with imports into China falling on a year-on-year basis for the first time since August 2020.
Production delays and disruptions could have material impact on other economies as well, at a time when consumer confidence in major markets like the U.S. is starting to show signs of weakness.
Some of the world’s biggest tech companies like Apple (+1.63%) could be affected as well, with some Chinese factories that assemble components for the iPhone suspending production.
And even where production can continue, it can be as low as 40% of capacity, with raw materials unable to head to factories and finished goods unable to move out.
Nevertheless, the impact on major tech firms like Apple is expected to be limited for now, because the Chinese factories affected assemble less popular models of the iPhone and the flagship iPhone 14 is only due to kick off production late in the third quarter.
But for other manufacturers, especially for printed circuit boards, and every other electronics gadget, from toasters to Toyotas, these chip shortage delays that plagued the world during the pandemic are likely to worsen.
