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Shanghai Lockdown will affect China

In: Finance

Shanghai is a major financial and trade hub, it’s also the second-richest city, following Beijing. With a 3.8% contribution to China’s GDP, the lockdown could be an impact largely felt.

Shanghai’s lockdown will likely affect heavily businesses reliant on consumer spending, though the city’s industrial sector can largely withstand the disruption, mitigating threats to the global supply chain.

According to estimates by NatWest Group Plc, the lockdown in Shanghai and the effects from the measure may reduce around 0.4 percentage point from China’s economic growth in the first and second quarter.

In an attempt to curb China’s worst Covid outbreak since Wuhan in early 2020, the restrictions targeting half of the city at a time will bar the city’s residents from leaving home, that will likely hurt employment in the services industry and weigh the most on small businesses.

China Renaissance Securities in Hong Kong pointed to impacts on industries that rely on in-person and social gatherings, especially catering. They also stated that COVID suppresses people’s confidence and expectations for spending.

The forecast for gross domestic product growth in the first quarter is 4.7%, the gradual recovery of the services and consumption sectors could take around eight weeks.

The damage to consumer sentiment may be more lasting, putting the government’s full-year growth target of about 5.5% under threat.

High frequency indicators and company statements released so far suggest a likely temporary hit to factory production as the government tries to minimize the fallout.

Economists have been downgrading China’s growth forecasts for the year as outbreaks linked to the highly infectious omicron variant continue to spread.

Nomura Holdings Inc. warned China’s economy faces its worst downward pressure since the pandemic began, even before the Shanghai lockdown was announced.  

The bank wrote in a note that markets should be concerned about a slide in growth in the second quarter as they downgraded quarterly forecasts for the rest of the year.

So far the lockdown allows for continued operations at financial institutions and ports. Anything beyond the current plan risks disruptions to financial flows and international trade.

Similar to Shenzhen, Shanghai is the economic powerhouse of the country. The scale is larger but the action has been prompt, hoping to minimize the economic impact as soon as possible. China can likely limit the damage to supply chains as long as the lockdown doesn’t last longer than three weeks. A closed loop system tested in Shenzhen, where factory workers were living in dorms, working in a bubble separated from the general public, could be the solution to lessen the impact on the economy.

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