Many global corporations have a presence in Shanghai, from Tesla’s gigafactory to a massive Disney resort. However, the normally bustling financial centre has been halted in recent days due to an increase in coronavirus diagnoses.
Officials enforced a lockdown on the city’s more than 26 million citizens with little warning. Last week’s limitations, which began as a two-stage lockdown, have now been increased to encircle almost all inhabitants in their houses.
Since the coronavirus outbreak was initially found in Wuhan at the end of 2019, China’s latest round of quarantining is the country’s largest.
This stalemate could prove especially costly for the world’s second-largest economy.
Shanghai is a major financial centre as well as a manufacturing centre for semiconductors, electronics, and automobiles. It is also the busiest maritime port in the planet.
Short-term supply chain disruptions, according to Xu Tianchen, China economist for the Economist Intelligence Unit, will have an impact on China’s economy as a whole.
“There will also be ripple effects elsewhere because of the interconnectedness between Shanghai and other regions of China, especially the manufacturing hub of the Yangtze River Delta,” he said.
On a more local level, the city known for high-end boutiques such as Gucci and Louis Vuitton has already seen a drop in customer spending.
According to Xu, lost sales at merchants, hotels, and restaurants might cost Shanghai 3.7 per cent of its yearly Gross Domestic Product (GDP).
GDP is a vital indicator of an economy’s health or lack thereof.
The Chinese government has set a 5.5 percent growth target for the country’s GDP this year. However, some analysts believe it will be difficult to achieve that target.
Data released at the end of last week indicated that China’s manufacturing and services sectors slowed in March.
It happened after Shenzhen and Jilin, both in China’s industrial north-east, were shut down last month to allow officials to undertake mass coronavirus testing and try to stop the spread of the highly transmissible Omnicron variant of Covid-19.
“We have seen PMI data, which shows that both manufacturing and services sectors are actually hit hard. And that has not included the Shanghai lockdown. So I think qualitatively we’re seeing more downside pressure for the first and second quarters of GDP data,” according to Peiqian Liu, China economist for NatWest Markets.
The PMI data is a summary of market conditions compiled by polling top executives in important industries about their expectations for a variety of parameters such as new orders, production, and employment.
With the number of coronavirus cases on the rise, there could be more trouble ahead if additional lockdowns are implemented, particularly for small business owners.
“The focus is much more on how employment is going to hold up in a prolonged lockdown or extended period of uncertainties of lockdown due to outbreaks.
“So I think the service sector is not only facing a short-term pressure from a three-week lockdown from Shenzhen or a one-week lockdown from Shanghai, but facing much more pressure from the uncertainty that’s going down the road with current set of Covid management policies,” Liu said.
While some businesses in Shanghai have chosen to close during the lockdown, others in industries such as financial services and automobile manufacture, according to Liu, have established so-called “closed-loop” systems.
This essentially means that employees must both live and work in their offices or factories.
“Imagine what happened in the Winter Olympics. It was also a closed-loop management, just to ensure that things within the bubble works operationally normal, and that they isolate people from outside or from the rest of China.”
However, as Xu points out, it is not a method that can be sustained over time.
“There’s a concern that if lockdowns become prolonged and disruptions to the transportation to the supply chain persist, businesses will be unable to source supplies.
“So they are having an impact on road transport. The obvious risk is that Shanghai fails to eliminate the current outbreak quickly,” he said.
(Adapted from BBC.com)