How does the confinement in Shanghai impact the world economy?

Hong Kong (CNN Business) — China is struggling to contain a Covid-19 outbreak in Shanghai, despite a 17-day lockdown that keeps most of its 25 million residents indoors.

Shanghai, located on the east coast of China, is the largest and most prosperous city, as well as one of the largest metropolises in the world. Together with the neighboring city of Kunshan, which went into lockdown earlier this month, it plays a considerable role in the world economy.

With no sign that China’s government is willing to ease restrictions any time soon, concerns are growing about the economic damage they are causing, and the impact a prolonged lockdown will have on the world.

Shanghai is the epicenter of the current covid-19 outbreak, but it is not alone: ​​Nomura analysts estimate that there are full or partial lockdowns in 45 Chinese cities, affecting a quarter of the population and about 40% of the economy. .

Premier Li Keqiang warned on Monday, for the third time in a week, of the threat posed by the significant increase in covid to China’s economy. These are three reasons why the rest of the world should also keep a close eye on Shanghai.

shanghai lockdown

The lockdown continues in Shanghai on April 6, 2022 to curb coronavirus infections.

business and finance

Shanghai has the highest GDP of any Chinese city: 4.32 trillion yuan ($679 billion), the third largest stock market in the world by the value of companies listed on it, and the fifth largest number of billionaires in the world. world.

Shanghai is also the most attractive destination for international companies that want to be present in mainland China.

By the end of 2021, more than 800 multinational companies had established their regional or national headquarters in Shanghai, according to city authorities.

Among them, 121 are Fortune Global 500 companies, such as Apple, Qualcomm, General Motors, Pepsico and Tyson Foods.

More than 70,000 foreign-owned companies have offices in the city, of which more than 24,000 are Japanese companies, according to Japan government data.

With a total market capitalization of $7.3 trillion, the Shanghai Stock Exchange, created in 1990, is second only to New York and London. Stock trading continues despite the lockdown, but some banks and investment firms have asked staff to sleep next to their desks to keep the market running.

The set of companies listed on the Shanghai Stock Exchange is highly focused on large state-owned companies that play a key role in China’s economy. They include the world’s most valuable liquor maker, Kweichow Moutai, banking and insurance giants such as ICBC and China Life Insurance, and state-owned oil company PetroChina.

The Shanghai Stock Exchange is also home to China’s answer to the Nasdaq: the Star Market.

trade and logistics

Shanghai accounts for 3.8% of China’s GDP. But it has an even larger share in terms of trade with the rest of the world (10.4%), according to official statistics from last year.

The port of Shanghai is the busiest in the world in terms of container traffic. In 2021, it moved 47 million 20-foot cargo units, four times the volume of the Port of Los Angeles. This figure accounted for 16.7% of China’s total container shipments last year.

Shanghai also represents a major aviation hub in Asia. The city’s airports, Pudong International Airport and Hongqiao Airport, handled 122 million passengers in 2019, making the city the fourth busiest hub in the world after London, New York and Tokyo.

But the current wave of Covid-19 has worsened delays at ports and forced the suspension of many passenger flights, sending air cargo rates skyrocketing and further straining global supply chains.

Shanghai port is still operational, but industry data released at the end of March showed the number of ships waiting to load or unload had soared to a record high. State media also reported that many carriers were having difficulty getting containers in and out of the port on time due to travel restrictions.

Manufacturing and technology

The Shanghai metropolitan area, which includes Kunshan and other eastern cities, is a major manufacturing hub for industries ranging from automobiles to semiconductors.

Volkswagen and General Motors have factories in Shanghai in collaboration with state-owned automaker SAIC Motor. Shanghai is also home to Tesla’s first gigafactory in Asia. The US electric vehicle maker delivered more than 65,000 vehicles from its Shanghai factory last month, becoming the best-selling electric vehicle brand in China.

In January, Ford established its sixth global design center in Shanghai, highlighting the city’s vibrancy and growing number of young Chinese designers with a mix of “fresh thinking, local knowledge and global perspective.”

TSMC, the world’s largest contract chipmaker, runs a major semiconductor factory in suburban Songjiang. The main Chinese chipmakers, SMIC and Hua Hong Semiconductor, have factories in Pudong, east of the city.

But Covid restrictions have forced many factories to suspend operations in Shanghai and Kunshan, threatening to disrupt key supply chains for cars and electronics.

Volkswagen and Tesla factories in Shanghai have been closed for weeks. Chinese electric vehicle maker Nio has also had to halt production due to Covid-related disruptions in Shanghai and other Chinese cities.

Pegatron, a key supplier to Apple, has suspended production at its Shanghai and Kunshan plants until further notice. In addition, Taiwanese company Unimicron Technology, which supplies printed circuit boards to Apple, and Eson Precision, a subsidiary of Foxconn, a major iPhone supplier that also supplies components to Tesla, halted production at their Kunshan facility earlier this month.

Citi analysts also noted in a research note late last week that due to Shanghai’s significant trade links with East Asia, this situation could impact regional supply chains.

“We think that Korea, Taiwan, Vietnam and, to a lesser extent, Japan (in terms of vehicles) appear relatively exposed. [a las interrupciones]”, they pointed out.

Another sector affected is the pharmaceutical sector. In October, AstraZeneca opened a global research and development center in Shanghai.

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