A security guard helps a resident collect their deliveries as more items are placed on a table at the gate of a residential community under lockdown in Shanghai on March 29. A two-phase lockdown of Shanghai’s 26 million people is testing the limits of China’s hardline “zero-Covid” strategy, which is shaking markets far beyond the country’s borders. Photo: AP
Opinion
Macroscope
by Tommy Wu
Macroscope
by Tommy Wu
Surprise Shanghai lockdown adds to China’s economic and supply chain fears
The impact of the lockdown on Shanghai itself might not be that great, but it still has significance for the future of China’s approach to Covid-19
The sight of Shanghai’s sophisticated strategy failing could lead governments with fewer resources to resort to crude, large-scale lockdowns
An unexpected lockdown in Shanghai has raised concerns over China’s economic and supply chain prospects. While we think the additional impact from the Shanghai lockdown on its own might not be as substantial as some expect, what it means for the future of China’s Covid-19 strategy is still significant.
The announcement of the lockdown in Shanghai on March 27 came as a surprise after the city’s authorities had repeatedly resisted calls for a full-scale shutdown. The city has struggled to contain the spread of the virus in recent weeks, using a targeted approach to restrict mobility in specific neighbourhoods to avoid broader disruption.
Although most new Covid-19 cases are asymptomatic, the Shanghai government has reversed course and decided to impose a full-scale lockdown in two phases. Starting on Monday, half of the city was shut down for testing for four days; the other half will be locked down for four days from Friday.
We expect the additional impact from the lockdown in Shanghai might not be that significant given that the city had already imposed tighter restrictions in many neighbourhoods in the past few weeks. This means some of the economic damage has already been done.
Some industrial activities and most financial and commercial activities should be able to continue, which will help mitigate the economic impact of the lockdown. Some factories are likely to continue operating, at least partially, under “closed loop” arrangements in which employees can work and live in premises isolated from the general public.
Meanwhile, the Shanghai Stock Exchange remains open, and some financial companies have even asked staff to stay in their offices during the lockdown period to maintain operations. Many business activities can still be done with staff working from home. The fact that China’s overall mobility has not deteriorated further is also encouraging.
Still, consumer services will stop during the lockdown. Even though ports will continue to operate, logistics will be disrupted as strict mobility restrictions will slow truck transport. This will have some impact on China’s domestic supply chain and exports, and global supply chains will be affected. Some container ships might divert to other nearby ports, causing port congestion elsewhere.
The lockdowns in Shenzhen in mid-March and now in Shanghai illustrate the challenge the government faces in maintaining a “zero-Covid” approach to the more transmissible Omicron variant. The Shanghai lockdown could have major implications for how China’s zero-Covid strategy will be implemented in the future and could delay an eventual exit from this approach.
Shanghai’s lockdown model had been lauded as China’s biggest success because the city had been able to avoid a full shutdown thanks to its targeted approach supported by its pool of health resources, talent and technology. But with this setback, it’s not unreasonable to think other cities and provinces that generally have fewer resources and less-sophisticated containment strategies could start to favour large-scale lockdowns if Omicron cases rise sharply.
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Grocery runners feed Shanghai as city hit by record Covid-19 cases
Grocery runners feed Shanghai as city hit by record Covid-19 cases
Even though we might see more large-scale lockdowns in the future, they could also be swifter. In a better-case scenario, economically important coastal provinces could consider imposing severe but swift lockdowns to minimise the economic impact, following the approaches taken by Shenzhen and Shanghai.
In Shenzhen’s case, it imposed a lockdown for one week before easing most restrictions quickly afterwards. Restrictions had already started to ease in manufacturing facilities and some residential districts a couple of days before the lockdown officially ended.
Shanghai’s approach of splitting the lockdown period into two halves could also help reduce the economic impact. In net terms, the damage to the economy of a swift lockdown for a few days or a week might not be as bad as having restrictions drag on for weeks.
Still, it is too early to tell how the approaches taken by local governments will change following the events in Shanghai. There now appears to be a higher risk of more large-scale lockdowns in China. This raises concerns over further disruption to supply chains and dampens investor sentiment as well as business and consumer confidence.
In general, though, the government will aim to maintain a “dynamic zero” approach while trying to fine-tune its strategy to minimise the impact of restrictions on the economy and daily life. However, we expect the process to be bumpy.
Previously, we trimmed our 2022 GDP growth forecast further to 4.8 per cent to reflect the impact from the latest Omicron outbreaks and restrictions. We have also factored in more significant fallout from the Russia-Ukraine war on global growth and commodity prices, further dampening China’s export outlook.
With downside risks rising, we think more policy easing will be needed if the government wants to push growth closer to its target of “around 5.5 per cent” for 2022. We anticipate more significant monetary policy easing in the coming months.
