While many global economies have learnt to live with Covid, China has clung to a zero-tolerance policy placing entire cities into strict lockdowns in a bid to control infections. The major economic capital Shanghai has been the latest with China’s technology hub of Shenzhen also put into lockdown last month. Anger has reportedly grown from residents with accounts of widespread food shortages and children being removed from their parents if they test positive.
Under the rules residents are barred from leaving their homes even to buy essentials which has left delivery services, including government supplies, overwhelmed.
Meanwhile the economic impacts of such disruption are starting to become abundantly clear with key indicators pointing to a slow down in China’s service sector.
Craig Botham, Chief China+ Economist at Pantheon Macroeconomics, warned: “Zero-Covid is getting costly.
“Not only that, but the costs are set to rise.
“The latest PMI reading is the weakest since the outbreak of the pandemic, but we think it will weaken further next month.”
The Caixin services Purchasing Managers’ Index (PMI) nosedived below 50 to 42 this week indicating the biggest fall in economic activity since the start of the pandemic.
Unlike in previous lockdowns, Shanghai started with a staggered approach splitting the city in two, however this has appeared to fail to bring cases down leading to the entire city of 26 million people now entering full lockdown.
Mr Botham warned: “The increased transmissibility of Omicron is much more challenging for zero-Covid policies.
“The geographical spread of the outbreak is also widening, which will bring a greater share of GDP under the sway of damaging restrictions.”
Rather than change approach though, he suggested authorities were likely to instead switch to more stringent policies, motivated by the failure of the initially soft approach in Shanghai, resulting in greater “drag on economic activity.”
Beyond China the shutdown of such vital business hubs threatens to derail the fragile recovery in supply chains seen in the wake of the pandemic.
Alex Holmes, Emerging Asia Economist at Capital Economics, warned: “The possibility of major disruption to supply chains remains a large and growing risk.”
Shipping giant Maersk has warned of supply chain bottle necks, mainly linked to shortage of trucking capacity while ports themselves have remained open.
Anne-Sophie Zerland Kalsen, Maersk Head of Asia Pacific Ocean Customer Logistic, said: “Landside transportation efficiency is reduced due to availability of truckers.
DON’T MISS:
Sunak savaged as National Insurance rise hits businesses [SPOTLIGHT]
Russia on brink of default following US sanctions [ANALYSIS]
Ukraine war and China’s lockdown hit car giant BMW’s global deliveries [REVEAL]
“We are doing everything we can to alleviate our customers pains by increasing our activities on rail and barges and will continue to follow this rather fluid situation closely.”
Thomas Pugh, economist at RSM UK, said: “Although China has so far managed to avoid the widespread shutdowns of factories and ports, which crippled global supply chains during the pandemic, it seems inevitable that there will be some disruption, especially to the supply of construction and manufacturing materials.”
In Shanghai, lockdown has impacted US carmaker Tesla with its factory which typically makes over 2,000 vehicles a day continuing to remain closed.
In a tweet CEO Elon Musk described an “exceptionally difficult quarter due to supply chain interruptions and China zero Covid policy”, although the firm still managed to reach an all time high in sales.
Other carmakers have been less fortunate with BMW reporting a -6.2 percent decline in vehicle deliveries for the first quarter, blaming a combination of factory disruption in China and Russia’s invasion of Ukraine.