Equity week ahead: The biggest risk to the global economy that no one is talking about

New York
CNN Business

Nearly 400,000 million people in 45 cities across China are under full or partial lockdown under China’s strict zero-Covid policy. Together, they account for 40%, or $7.2 trillion, of the world’s second-largest economy’s annual gross domestic product, according to data from Nomura Holdings.

Analysts are sounding the alarm, but say investors are misjudging the severity of the global economic fallout from these extended isolation orders.

“Global markets may still underestimate the impact as much of the attention remains focused on the Russia-Ukraine conflict and U.S. Federal Reserve rate hikes,” wrote Lu Ting, chief economist at Nomura for China and his colleagues in a note last week.

Most alarming is the indefinite lockdown of Shanghai, a city of 25 million people and one of China’s major manufacturing and export hubs.

Quarantines there have led to food shortages, inability to access medical care and even reported animal killings. They also left the world’s largest port understaffed.

The port of Shanghai, which handled more than 20% of Chinese cargo traffic in 2021, is essentially at a standstill. Food supplies stuck in shipping containers without access to refrigeration rot.

Incoming goods are now stuck in Shanghai’s sea terminals for an average of eight days before being transported elsewhere, a 75% increase since the recent round of lockdowns began. Storage time for exports has decreased, but that’s likely because no new containers are being sent to the docks from warehouses, according to the Supply Chain Visibility Platform project44.

Cargo airlines have canceled all flights to and from the city, and more than 90 percent of trucks providing import and export deliveries are currently out of service.

Shanghai produces 6% of Chinese exports, according to the government’s statistical yearbook for 2021, and factory closures in and around the city further disrupt supply chains.

The factories of suppliers Sony and Apple in and around Shanghai are idle. Quanta, the world’s largest contract laptop maker and a MacBook maker, has halted production altogether. The factory accounts for about 20% of Quanta’s laptop production capacity, and the company previously estimated it would ship 72 million units this year. Tesla closed its Shanghai Giga factory, which was producing around 2,000 electric cars a day.

China’s Ministry of Industry and Information Technology said in a statement on Friday that it had sent a task force to Shanghai to work on a plan to resume production at 666 key manufacturers in the lockdown city. . Tesla executives hope they will be allowed to reopen by Monday, ending the factory’s longest hiatus since it opened in 2019. The automaker has lost more than 50,000 production units so far. now, according to documents reviewed by Reuters.

“The impact on China is major and the repercussions on the global economy are quite significant,” said Michael Hirson, Eurasia Group practice leader for China and Northeast Asia. “I think we’re going to see more economic and social volatility and disruption for at least the next six months.”

Prolonged disruptions to Chinese manufacturing and shipping could help accelerate a key Biden administration initiative aimed at reducing US dependence on Chinese products and supply chains.

But the task comes with serious immediate economic repercussions.

In a report released last week, the World Trade Organization warned that a worst-case scenario involving the decoupling of global economies, spurred by Russia’s invasion of Ukraine, could reduce global GDP in the long run. by 5%.

This is highly unlikely given the deep financial ties between China and the United States. Investments in each other’s stocks and bonds reached $3.3 trillion at the end of 2020, according to data from Rhodium Group.

“These are still very intertwined economies,” Hirson said. “This integration is not something that is going to be easily reversed because it would be incredibly costly for the United States and for the global economy.”

Yet US economic leaders believe that decoupling is already in progress. Oaktree co-founder Howard Marks wrote in late March that “the pendulum [has] back to local sourcing” and away from globalisation. Blackrock Chairman Larry Fink echoed that sentiment in a letter to the company’s shareholders. “The Russian invasion of Ukraine, he writes, put an end to the globalization that we have known for the past three decades.

In a speech to the Atlantic Council last week, Treasury Secretary Janet Yellen said the United States is closely monitor China’s political and economic ties with Russia. “Going forward, it will be increasingly difficult to separate economic issues from broader considerations of national interest, including national security,” she said.

While she said she hoped a “bipolar divide” between China and the United States could be avoided, “the world’s attitude towards China and its willingness to embrace deeper economic integration could well be affected by China’s reaction to our call for resolute action against Russia”.

A third of China, meanwhile, is in quarantine and its economy is suffering.

China’s recent response to the pandemic will likely cost at least $46 billion in lost economic output per month, or 3.1% of GDP, according to a study by the Chinese University of Hong Kong.

Analysts no longer believe that China’s 5.5% economic growth target for 2022, the country’s least ambitious target in three decades, is realistic. The World Bank revised its estimate of China’s economic growth this week to 5%, but noted that while its restrictive policies continue and could fall to 4%.

The economic charges come at a politically precarious time. This fall, Chinese President Xi Jinping will seek a third term as the nation’s leader, breaking with the tradition of a two-term maximum.

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