Monday, March 27

Shanghai’s ‘grim’ Covid outbreak threatens more global supply chain disruption | Chinese economy

The Covid-19 outbreak in Shanghai remains “extremely grim” with the ongoing lockdown of China’s financial powerhouse threatening to devastate the country’s economy and cause major disruption to already very stretched global supply chains.

As Shanghai another announced daily record high of 16,766 cases on Wednesday, the director of the city’s working group on epidemic control was quoted by state media as saying that the outbreak in the city was “still running at a high level”.

“The situation is extremely grim,” Gu Honghui said.

Although low by international standards, this is China’s worst outbreak since the virus took hold in Wuhan in January 2020 sparking the global pandemic.

Shanghai’s entire population of 26 million is now locked down and there is growing discontent among people who have been living with restrictions on their movements for weeks as the authorities stick doggedly to their zero-Covid policy of eliminating the disease.

At least 38,000 medical personnel have been deployed to Shanghai from other parts of China, along with 2,000 military personnel, and the city is mass-testing residents.

A separate outbreak continues to rage in the north-eastern province of Jilin and the capital, Beijing, also saw an additional nine cases. Workers shut down an entire shopping center in the city where a case had been detected.

There are increasing signs that China’s economy is slowing down sharply because of the lockdowns. Activity in China’s services sector contracted at the steepest pace in two years in March as the surge in cases restricted mobility and weighed on demand. The closely watched Caixin purchasing managers’ index (PMI) dived to 42.0 in March from 50.2 in February. A drop below the 50-point mark separates growth from contraction.

The same survey showed a contraction in the country’s giant manufacturing sector last week and economists warned on Wednesday that there could be worse to come as the Shanghai lockdown begins to affect the figures for the coming months.

Alex Holmes of Capital Economics said spill overs to the rest of Asia from the Covid outbreak in China have been relatively minor so far but “the possibility of major disruption to supply chains remains a large and growing risk”.

“The longer the current wave lasts, the greater the chance,” he said.

“An added risk factor is that after many months of disruption along their entire length, global supply chains are already very stretched. There is now a much greater potential for a small bottleneck to have large repercussions.”

Two years of disruption from the pandemic has dislocated the global economy’s complex supply chains, causing a sharp rise in the prices of commodities, food and consumer goods.

The war in Ukraine has added to inflation, especially in oil and grain prices, and further shutdowns in China could worsen the situation.

Supply-side strains in the Asia-Pacific region will remain elevated at least through the end of the year, with energy and raw material cost inflation posing the biggest cost pressures for corporate debt issuers, followed by the effects of transportation bottlenecks, according to a new report by Moody’s Investors Service.

“The Russia-Ukraine crisis and continued pandemic-led disruption will hold back supply-side recovery, despite initial signs of a gradual pickup in Asia Pacific,” said Lillian Li, senior credit officer at Moodys credit rating agency.

“All corporate sectors in the region will be exposed to cost risks from supply-side pressures to varying degrees through at least the end of this year.

It comes amid a warning from a leading central bank chief that the world economy may be on the brink of a new inflationary era where consumers will be faced with persistently higher prices and rising interest rates due to the retreat of globalisation. Agustín Carstens, head of the Bank for International Settlements, said higher rates could be required for several years to combat inflation which is 6.2% in the UK.

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