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Shanghai’s lockdown – What might it mean for global supply chains?

A prolonged Covid-lockdown of Shanghai could cause longer-than-expected disruption to global supply chains and raise inflationary pressure. As one of China’s…

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This article was originally published by BNP Paribas Asset Managment Blog ( Investor's Corner)

A prolonged Covid-lockdown of Shanghai could cause longer-than-expected disruption to global supply chains and raise inflationary pressure. As one of China’s largest hubs, Shanghai’s manufacturing and transport capacity is simply too big to be replaced elsewhere.  

China’s persistent lockdowns and the impact of sanctions on Russia concerning numerous commodities are currently exacerbating supply bottlenecks, heightening the risk that inflation will run higher for longer.

Outbreaks of the Omicron variant has driven China to renew tough restrictions on the movement of millions of people, including lockdowns of major cities. Shanghai, where the clampdown started in late March and is still ongoing, has become the new hotbed of the outbreak, following Shenzhen, which was locked down in mid-March.

Among China’s 100 largest cities, eight – accounting for almost 9% of GDP – were shut down fully or partly by late April. Other cities accounting for a further one-third of GDP were in partial lockdown.

The widening of curbs is intensifying the pandemic-related drag on China’s economic growth and adding to transport and production disruptions, with spillover effects on global supply chains.

Channels of disruption – Threefold

In Shanghai specifically, the lockdown conditions are causing three forms of blockage.

The city is one of China’s most important manufacturing centres, so the current restrictions disrupt movements of product for export.

It is also the world’s largest and busiest port. It handled more than 43.5 million TEUs [1] in 2020, almost 20% more than the world’s second-largest port, Singapore. Within China, Shanghai’s capacity is 1.5 times larger than the second-largest port, Ningbo-Zhoushan (which is the third largest in the world) (see Exhibit 1).

Locking down Shanghai disrupts local and global supplies through the logistics channel, causing delays and stoppages in transport from factories to the port and hampering cargo processing at the port.

Lastly, disruption is also being seen in the intermediate goods channel, as Shanghai is an import centre for many goods and materials used as inputs in the products that China exports.

Feeling Shanghai’s impact

Shanghai’s port accounts for more than 20% of China’s total export shipments and almost 8% of manufactured exports to world markets (see Exhibit 2). Its huge capacity cannot be taken on easily elsewhere in China. Furthermore, when China cannot import intermediate goods, the bottleneck in inputs aggravates the production disruption as producers run out of input inventory.

While there are reports of factories in Shanghai, and other cities, retaining staff at offices overnight to keep business and production going, supply and logistical bottlenecks within China have clearly intensified and had knock on effects.

The pace of growth in volumes of freight traffic in China fell after a brief recovery before the Omicron variant hit. Delays in goods delivery have also increased sharply, with the impact being felt in the US (see Exhibit 3). These signs do not bode well for global supply chains as the lion’s share of Chinese exports produced outside Shanghai goes through its port for onward shipment to world markets.

It is uncertain how long Shanghai’s lockdown will last. If it is prolonged, the shock could worsen the impact of sanctions against Russia in a range of commodity markets, intensifying the supply disruption, deepening global inflation, and potentially leading to more aggressive interest rate policy at the leading central banks.

If higher inflation erodes economic growth significantly, the risk of stagflation could rise, putting global monetary policy and asset markets in a difficult situation, though this is not our base case scenario at present.

Not so bad – Yet

It is too early to draw a pessimistic conclusion. One indicator for global supply chains disruption is the share of containers leaving major US ports empty. This is because during periods when demand for imported goods in America is particularly high (perhaps due to limited supply), it may be far more lucrative for shipping companies to transport goods from Asia to the US than vice versa — meaning shippers are often in such a hurry they skip the loading process in the US in order to return the container to China empty. 

After rising to historical highs across several US ports late last year, a recent industry study shows that the percentage of outbound empty container space started to decline for large ports such as Houston and Savannah despite the Omicron wave and China’s disruption [2].

Furthermore, China’s logistics costs, so far, show no sign of a rising trend.


References

[1] Twenty-foot equivalent unit is a measure of cargo capacity used for container ships and container ports. It is based on the volume of a standard 20-foot-long container that can be easily transferred between ships, lorries and trains.

[2] ‘Tracking Global Supply Chains as China Locks Down’, JPMorgan Global Economic Research Daily Economic Briefing, 3 May 2022, pp. 3-5.

Disclaimer

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience.

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Writen by Chi Lo. The post Shanghai’s lockdown – What might it mean for global supply chains? appeared first on Investors’ Corner – The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.


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