China’s Covid crisis is bad for business

Authorities across China are trying to combat the spread of the country’s worst Covid-19 outbreak in two years by placing millions of residents in lockdown, curbing transport and shutting factories in a series of heavy-handed measures.

Since Covid-19 first emerged in the central city of Wuhan in late 2019, China has suppressed large-scale outbreaks through its whack-a-mole “zero-Covid” strategy, primarily involving lockdowns that confine swathes of the population to their homes.  

The National Health Commission reported 5,280 new Covid-19 cases on Tuesday, more than double the previous day’s tally and the highest daily count since the start of the pandemic.

Nearly 90 per cent of the mainland’s confirmed new symptomatic cases on Monday were detected in Jilin province in China’s northeast, accounting for more than 3,000 cases. The entire province of 24 million people has now been locked down and shut off from the rest of the country, where people who want to leave must have permission from the police. 

Although China claims to have only recorded 4,636 Covid deaths in a population of 1.4bn, health experts believe the increase in daily infections over the next few weeks will be critical in determining whether this fortress-like method of containment effectively tackles the spread of variants.

Here’s what you need to know.

Which Chinese cities have been locked down?

At least 11 cities and counties nationwide have been locked down because of this latest surge. The southern tech hub of Shenzhen, which has a population of 17 million and is home to headquarters of tech giants like Tencent Holdings Ltd, Huawei Technologies and Apple Inc supplier Foxconn, has told companies to halt all non-essential business activity or have employees work from home.

The north-eastern industrial centre of Changchun – a city of around nine million people, which accounted for about 11 per cent of China’s total annual car output in 2020 – has also entered a lockdown, which has forced Toyota and Volkswagen to suspend production. 

In the financial hub of Shanghai, authorities have cordoned off individual apartment buildings, closed schools, tested all residents and told residents not to leave the city unless necessary in a bid to stop the spread of the disease. China’s aviation regulator has said that 106 international flights scheduled to arrive in Shanghai will be diverted to other cities from 21 March to 1 May due to the rise in cases. 

While China’s caseload remains low by the metric of global standards (and less than a tenth of the UK’s current total), it’s the most in China since March of 2020, and the trajectory and geographic spread is cause for concern. 

What impact is this having on supply chains?

Manufacturers of everything from flash drives to glass for Apple iPhone screens are warning of shipment delays as they comply with the Chinese controls to curb the spread of the Omicron variant.

Some of China’s preventative measures have been applied in the key manufacturing hubs of Shenzhen, Dongguan and Changchun, and the Chinese financial centre of Shanghai, home to the world’s most active container port. 

Lens Technology, which supplies lenses and glass material to customers like Apple, said yesterday that the production and delivery of some products would be impacted after it suspended work at its Dongguan plant. Netac Technology, which makes portable hard drives and USB flash drives, similarly warned of shipment delays as its factory Shenzhen had to stop work.

Fabien Gaussorgues, who provides contract manufacturing services from a factory in Dongguan, said he was struggling to procure the parts needed for electric scooters, warehouse robots, and electric toys due to the lockdowns. “It’s not critical yet, but it’s getting more difficult every day,” he told Reuters. “Suppliers in Shenzhen cannot produce, so they’re not delivering goods. So next week we don’t have material for production.”

Other companies which have warned that Covid-19 restrictions are impacting their products include the Chinese automaker BYD, KFC operator Yum China, iPhone assembler Foxconn, Toyota and Volkswagen. 

What are the wider economic costs of zero-Covid?

The increase in cases and a zero-tolerance policy has fueled concern over China’s growth prospects, with its stock market slumping to its lowest level since 2020 this week as more provinces impose lockdowns. The rising tensions between Beijing and Washington over Ukraine are also hitting China’s stocks.

The lockdowns in multiple wealth-generating cities, such as Shenzhen, could affect half of the country’s gross domestic product. 

According to economists at Australia & New Zealand Banking Group Ltd, as cases jump elsewhere, half of China’s GDP and population will be impacted by the latest outbreak. “More cities may follow the practice of Shenzhen,” said Raymound Yeung, chief economist for Greater China at ANZ. “If the lockdown is extended, China’s economic growth will be significantly affected.” While Yeung said ANZ is not revising its forecast for 2022, it is “wary” of further restrictions. 

Nomura Holdings Inc. said that the economic costs of China’s zero-covid approach are too high, and market participants may be too optimistic about this year’s growth outlook. The bank expects a GDP expansion of 4.3 per cent, well below economists’ consensus forecast of 5.2 per cent.