The harsh lockdown in Shanghai and other parts of China is having a crippling impact on world economy | Photo Credit: BRENDA GOH
China’s zero-Covid policy threatens to deepen the disruption arising out of the Ukraine war
The world economy, laid low by the Russia-Ukraine war, is faced with serious supply disruptions in the wake of China’s self-inflicted zero-Covid policy. If the war has disrupted food, fertiliser and energy supplies, the China shutdown has extended the squeeze to manufactured goods such as phones and automobiles. The combination of the two sets the stage for a spell of pronounced global inflation. At this stage, it is hard to say whether the slowdown induced by the draconian lockdowns in China will offset this inflation push. The World Bank’s April edition of Commodity Markets Outlook, which focuses on the impact of the conflict, does not seem to take this prospect seriously. However, if the Chinese authorities crack down on city after city — from Shanghai and Shenzhen to Beijing, Xining, Taiyuan, Wuhu, Guangzhou — both the supply and demand scenarios arising out of Covid policies in China could diverge from IMF and World Bank projections.
At any rate, the world’s second largest economy, seems set to torpedo its own growth this year, and with it that of the world. The draconian lockdowns in Shanghai (China’s largest city with a population of 25 million and its financial hub) and other industrial townships have started to impact inputs for industries all over the world. China’s port-dotted eastern coast is choked with ships that can neither offload nor pick up new cargo. According to supply chain tracker Project44, in Shanghai “import container wait time had jumped by 163 per cent from 4.6 days on 28 March to 12.1 days as of 15 April”. The IMF’s World Economic Outlook released last month said that China is expected to grow at 4.4 per cent in 2022 and 5.1 per cent in 2023 but these numbers, low as they are, may head even lower, going by the intense lockdowns in the country. With the lockdowns hurting domestic consumption and investment, exports, which account for about 19 per cent of China’s GDP, will have to do the heavylifting – a prospect that could suffer in the event of an extended disruption of production, particularly in the Shenzhen province, and logistics. According to logistics consultancy Interos, more than 25,000 US entities buy directly from suppliers in Shenzhen, Shanghai or Jilin regions, a number that rises four times and eight times, respectively, when tier 2 and 3 suppliers are included. Foxconn (Apple’s contract manufacturer), GM, Volkswagen and Bosch, among others, are struggling to carry on their operations, with some of them keeping their employees onsite — a practice that cannot be pushed for too long. China, fearful of being overwhelmed by Covid in the run-up to the 20th Communist Party congress due in October, has decided to inflict extraordinary pain on its businesses. Whether it’s a case of politics prevailing over economics is hard to say for a country whose policy impulses have never been easy to understand.
India’s foreign trade policy, in the works, should take into account a new context where global supply chains are being refashioned. China has for sometime been rebalancing its economy away from labour intensive manufacturing. World trade patterns too could see significant changes in the wake of the ongoing war and China’s moves. But for now, disruptions in supplies of food and energy from Russia and Ukraine, coupled with that of finished goods from China, are here to stay – with implications for fiscal and monetary policy.
Published on May 06, 2022