September 26, 2022

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What Shanghai lockdowns mean for China Inc

3 min read

“SNATCH GROCERIES first, then get a covid test” has quickly become an anthem for the lockdown that started suddenly in Shanghai in the early hours of March 28th. Local hip-hop artists CATI2, P.J. and Keyso describe scenes of panic buying—qiang cai, or snatching groceries—and the threat of being locked out of one’s home amid a frenzied bid to control an outbreak of covid-19 in China’s main business and finance hub. One lyric hints that residents can grow vegetables in the small patches of land outside their apartments or scavenge for edible plants.

The song has attracted hundreds of thousands of views online in less than a day, bringing some cheer to an otherwise grim situation. China is currently facing its worst outbreak since the pandemic started in the city of Wuhan in 2020. Thousands of new cases of the highly transmissible Omicron variant are now being discovered each day. The large cities of Shenzhen and Shenyang, as well as the entire province of Jilin, have been locked down in recent weeks.

On March 28th it was Shanghai’s turn. The two-phase lockdown of the city, whose 26m inhabitants have been mostly spared harsh containment efforts over the past two years, was announced only hours before it began at 5am that morning. The local government had gone to great lengths to avoid shutting down the metropolis, especially its wealthy central districts. Now that these are under quarantine, it will find it difficult to present an image of business as usual—chiefly because business is anything but.

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The lockdown’s first phase covers areas east of Huangpu river, home to the main financial centre (and the city’s iconic skyline). Many white-collar workers have packed up toiletry bags and moved into their offices until April 1st, when the lockdown is supposed to be lifted in the east and imposed instead in western neighbourhoods. In order to keep the stock exchange running, employees are said to be sleeping on the floor of the bourse. Countless companies listed in Shanghai have put out statements in recent days to notify investors that they are shutting down their factories in the region and, in some cases, elsewhere in the country. Tesla is suspending production at its electric-car factory in the city, according to Reuters.

The pain will be felt abroad, too, just as it was amid the lockdowns in Shenzhen, another city deeply entangled in global supply chains. Although seaborne traffic can be diverted from Shanghai to other ports, such as Ningbo around 100km to the south, the cross-border flow of people is being disrupted. International flights have been rerouted to airports in other cities. Shanghai’s tourism businesses are bracing for a year that will be even worse than 2020.

The situation will further dent business sentiment already knocked by smaller-scale rolling lockdowns, laments a foreign fund manager, who has been stuck home for weeks. China’s purchasing managers’ index for emerging industries, such as green technology and biotech, recorded a sharp drop in March, compared with February. It was the worst reading since the index was launched in 2014.

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Regardless of its precise economic cost, which will only become apparent with time, the Shanghai lockdown is the biggest test yet of China’s draconian “zero-covid” approach to snuffing out the virus. Admittedly, Chinese authorities have shown an ability to learn and adapt to the virus. Shanghainese officials are borrowing from their counterparts in Shenzhen and experimenting with “production bubbles”, which involve busing workers to and from factories in a covid-controlled manner. Some big companies, including Foxconn, a giant contract manufacturer that assembles iPhones for Apple, have pulled this off. If such ruses work, China may be able to cling to its zero-covid approach for longer. If they fail—as they well might given Omicron’s extraordinary transmissibility—the authorities will come under growing pressure to relent.

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