The economic impact of China’s lockdowns

Sascha: [00:00:02] From Equity Mates Media. Welcome to The Dive. I'm your host, Sascha Kelly. What was your lockdown like? Every time I ask someone that our experiences are so different for you, it might have been awful or just dull or even disappointing. But at least for most of us, it's in the past. For residents of Shanghai, it's not. And this isn't a lockdown familiar to me.

Audio clip: [00:00:27] We unswervingly insist on zero COVID.

Sascha: [00:00:30] This is one where the government has told you not to leave the house for anything.

Audio clip: [00:00:35] I wasn't really prepared for this long. I thought I was going to be maybe a week or ten days. Now this feels like it's indefinite.

Sascha: [00:00:45] Unable to get rid of your rubbish, walk your dog or even buy food. If an infection is found on a nearby floor of your apartment, you might be carted off to a quarantine facility. And food delivery is a logistical nightmare. Services might have been barred from where you're living or the drivers themselves are just too anxious to deliver. And while it's tempting to just ignore what's happening to people on the other side of the world, the fact is, wherever you are in the world, you're feeling the ramifications of this lockdown. It's Wednesday, the 18th of May. And today I want to know more about China's COVID zero policy and just how much is this a spanner in the works of the global economy? To do this, I'm joined by my colleague Darcy Cordell. Darcy. Welcome to the dive.

Darcy: [00:01:35] Thanks Sascha nice to be with you.

Sascha: [00:01:36] Lovely to be with you as well. Deep topic today what is happening in China.

Audio clip: [00:01:41] In many parts of the world. Most COVID restrictions are gone, but in China, this remains the strategy. Lockdowns such as this one. Darcy: [00:01:49] It is a deep topic and the world is sort of moving on from these lockdowns and taking a more liberal account of COVID. But China is moving in the other direction. They're doubling down on their zero-covid policy. Shanghai is a really dense city. It's an area of about 6340 square kilometres, half the size of Sydney, but it has the same population as the entire country of Australia. Over 26 million residents have been in a really harsh lockdown for almost 60 days. At the peak in Shanghai, they were reporting over 25,000 cases a day. This has come down significantly and they're now reporting about 1000 cases, most of which are in quarantine facilities or areas under strict control. But even with this control and low number of cases to China's leaders, zero means zero. The current requirement for lockdowns to end in each city or province is zero cases of community transmission for three consecutive days. So at the moment, 15 of the 16 of Shanghai's districts are at or approaching that COVID zero level, and restrictions are expected to begin easing in the next few weeks. But it's been a long and unforgiving seven weeks for the Chinese people. The chief of the World Health Organisation last week said that China's COVID zero policy is unsustainable. How did China respond? Audio clip: [00:03:12] If we chose to lay down now, our efforts will have come to nothing. Darcy: [00:03:16] They said they have. Quote zero tolerance for the questioning of zero covid. Sascha: [00:03:21] Because we started talking about shanghai. But really, this isn't just isolated to that city. This is a policy for the whole of China. Darcy: [00:03:29] Yeah, that's right. Across China, we're seeing the effects of the COVID zero policy and associated lockdowns, according to Japanese bank Nomura. 41 cities are under heavy COVID restrictions, and that accounts for almost 30% of China's total GDP and the worst might be yet to come. Sascha. There's been panic buying in Beijing supermarkets this week after about 50 cases were reported in the city. People are getting worried. Speaker 6: [00:03:55] In the Chinese capital, things have actually been relatively normal for most of the past two years. But now with the American variant spreading so quickly across China and threatening the capital, the mood has changed. Sascha: [00:04:06] That's a massive number of people and resources under restrictions. Now, I want to talk about this idea that I've heard you mention that by implementing these restrictions, China is simply turning their economy off and on. Can you explain what that means to me? Darcy: [00:04:21] Yes. It's not new news to say that China has been the manufacturing centre of the global economy. Audio clip: [00:04:27] Welcome to the place that calls itself the factory of the world. Darcy: [00:04:30] I mean, just have a look at the bottom of your coffee mug. Sascha: [00:04:33] Oh, yeah. Yeah, it says Made in China. Darcy: [00:04:35] There you go. My water bottle here, too. There's just so many countries, businesses and people that are reliant on China's production. And these companies, countries and people can't just switch suppliers. There's been billions of dollars of investment in building factories, infrastructure, and most other economies are actually running at full capacity. We can't just switch at ease and turn to a new supplier every month. Audio clip: [00:04:59] You have. 36,000 coffeemakers. That's two new machines for every Starbucks on the planet. Darcy: [00:05:05] So for right now, China has switched off part of its economy and the world is making dough. It is causing bottlenecks at ports, supply shortages on shelves, and higher prices for the goods that are making it out of China. But China has successfully shut down a city in Shanghai, and their leaders appear confident that they will be able to switch the economy back on when they need to. But that remains to be seen. Sascha: [00:05:30] Okay. So there's this assumption by the Chinese leaders that this sleeping giant of demand, of global demand is just waiting in the wings when they turn it back on. But for now, they still have stopped producing. So I want to understand what that effect has on China's economy. Darcy: [00:05:48] Unsurprisingly, it's a serious handbrake. Here are a few statistics from the month of April released earlier this week, retail sales down 11%. Industrial production down 3%. Manufacturing, including auto production falling 40%. Real estate collapsing. New construction starts falling 44%. And the one thing that grew was export growth by 4%. But that's actually a severe slowdown from 15% growth in March. Sascha: [00:06:17] When you listen back to back like that, Darcy, those are some pretty sobering statistics. But I think it's also important for us to talk about the human toll because I have come across some really confronting videos and reports on social media. Darcy: [00:06:29] Yet, Sascha, you painted the picture in your intro and these are really hard to watch. I've come across them, too. We've all experienced lockdowns being separated from family and loved ones. But what we're seeing in Shanghai is really extreme. Audio clip: [00:06:43] But I wasn't really prepared for this long. I thought I was going to be maybe a week or ten days. Now this feels like it's indefinite. Darcy: [00:06:53] You can't leave your house or apartment for anything. Sascha: [00:06:56] Even food residents here have been waiting for food. Hunger has pushed them to hit back at local authorities. Darcy: [00:07:03] I found lockdown in Sydney really hard and I know Melbourne must have been extremely tricky for you. But this is a hard lockdown of a different level. Sascha: [00:07:11] Yeah, I think when I heard that they just couldn't even get rid of their rubbish. That really hit home for me, you know. What must that be like after seven weeks of just having to live in your probably quite small apartment? Look, Darcy, I think that that's probably a good place for us to take a break. But in a moment, we're going to come back and have a look at how this is having an effect on the global economy. Welcome back to the Dive. I'm joined by my colleague Darcy Codell. And today we're talking about China's zero carbon policy. And I'm going to be honest, we just talked about the human toll. It's easy to ignore the problems of people on the other side of the world when you don't have to face problems. You know, we can also take them under the rug. But this lockdown is having a global effect. So can you tell me, Darcy, why this pinch is being felt the. Darcy: [00:08:00] Most immediate way the world is feeling? The pinch is in shipping. Shanghai is home to the world's largest container port, and the shutdown has created a huge bottleneck for global trade. Back in mid-April, 506 vessels were waiting outside China's port. That's compared to 260 in February. So you're probably asking why there more? Imagine a giant traffic jam, but with ships. Sascha: [00:08:27] That's quite the visual, Darcy. There's traffic jams in Melbourne. I can only imagine what it's like at sea. Darcy: [00:08:33] If you want more visuals. Sascha We posted an infographic on the Equity Mates Instagram last week and that shows the amount of vessels waiting outside China's ports. It's really mind blowing. Sascha: [00:08:44] Wow. Darcy: [00:08:45] And to give you a sense of how much China dwarfs the world in shipping. L.A. is the biggest port in the US and in 2020 it saw 9 million shipping containers come through the port. But Shanghai, they saw 45 million. Sascha: [00:08:59] I mean, we're used to the U.S. being the biggest and the best at everything. But that's incredible. Darcy: [00:09:05] It is. And it's just leading to a massive disruption to the world supply chain. And the damage doesn't stop. Just their business. Activity in the country services sector came in at its lowest pace since February 2020. The ripple effect of the current Chinese backlog might last till the end of this year and beyond. So just like with a traffic jam, there's always a flow on effect felt by the people waiting. And the average waiting time for import containers has blown out to almost 13 days in May. Now, this might not sound like a lot if you're not in logistics, but it's actually a 174% increase from just two months before then. As these containers stack up, it's harder to load and unload the vessels and they're just forced to wait longer and longer in port. So there's more ships waiting and more joining the queue. And that's just leaving this massive amount of ships waiting outside ports in China. Sascha: [00:09:58] It sounds a little bit like when you don't get on top of your email inbox and you're trying to check them and just more are coming in, and then those unread emails, the numbers just creeps higher and higher and you start getting so anxious. Darcy: [00:10:11] That the problem just compounds, doesn't it? Says the company. Sascha: [00:10:15] Exactly. Darcy: [00:10:16] But hear that traffic jam. It's not confined to your emails, Sascha. It's not confined to just a city or a neighbourhood. It's global from Apple to Amazon to Adidas. All of these companies have warned of disruption to their supply chains due to the lockdown of a city that handles 20% of China's international trade. Sascha: [00:10:37] You've also forgotten a very important brand, Darcy, that maybe I'll forgive you for not knowing about. And that's cosmetics giant Estee Lauder. Their subbrand, Clinique, raise their prices as a result of the supply chain issues as well. And I was not impressed. Darcy: [00:10:52] So sorry, Sascha. I don't know how I missed that. We've been speaking about Elon Musk as well. A lot on the dive recently. Audio clip: [00:10:59] We went to pretty much say thank you and appreciation for the Shanghai government and the support. Darcy: [00:11:05] His electric vehicle company Tesla has a huge factory in Shanghai. As you can imagine, it's been hit pretty hard trying to, I think long term will. Audio clip: [00:11:13] Be our biggest market. Darcy: [00:11:14] Last month, the factory produced less than 11,000 vehicles. That's 80% less than prior to the lockdown. Sascha: [00:11:21] Wow. That is some traffic jam. Now, Daisy, I've heard all of this is connected to the I-word that I just can't seem to avoid at the moment. And that's inflation. Audio clip: [00:11:31] Or one number the world was hanging on today was another consumer number, and that was China's latest inflation rate. Sascha: [00:11:37] From the picture you're painting, I imagine these transport bottlenecks, product shortages and increased transport costs are all contributing to this. Darcy: [00:11:46] Yeah, that's right. At the height of the disruption caused by COVID in 2020 and 2021, the price paid for ocean and air freight soared to new highs. For example, rates for containers on routes from Shanghai to the west coast of the US nearly doubled last year from $4,000 to almost 8000. And the International Monetary Fund estimates that global freight increases alone added 1.5 percentage points to this year's inflation forecasts. And now costs are rising again, according to research firm Link Shipping. One container from China to the west coast of the US now costs roughly twice as much as it did a year earlier. Sascha: [00:12:26] So until China kind of stops this and sorts itself out, we should expect inflation to keep rising. So I have to ask, will there be long term changes as a result of these policies? Darcy: [00:12:37] It's hard to tell at this stage. China is home to seven of the world's ten largest container ports, and these rolling lockdowns are raising alarm bells at businesses that rely on China and their supply chain. As the world emerges from COVID and tries to restart global trade. A stubborn China poses a risk to that restart. But we're actually yet to see companies move operations from China to other Asian nations or producers because of these long. Downs. Instead, we're seeing companies take more short term steps to mitigate the Shanghai lockdown. For example, IKEA, they're diverting goods from Shanghai to other ports and using rail freight rather than trucks. And they're also just ordering things earlier to prepare for these slowdowns. At the same time, some companies are starting to rethink new investments in China. Nearly one quarter of European companies in China that were surveyed are reconsidering whether to shift planned investments to another country. So to sum that up, such companies aren't leaving China yet, but maybe they're starting to reconsider moving there or investing more there. And it seems most companies think this lockdown will end in late May or June. But if it extends beyond, then maybe we'll start to see businesses leave China or reroute their supply chains more permanently. Sascha: [00:13:55] I think it's always fascinating to hear how one decision in one corner of the world, in Shanghai, in China can still have an effect on me and my purchasing decisions. Sitting in this room at the bottom of Australia in Melbourne, it's just amazing to hear how it all connected. I think we'll leave it there for today. Thanks so much for joining us for today's edition of The Dive. If there's a story that you want us to talk about, then feel free to get in touch. Contact us at the dive at Equitymates.com/contact or shoot us a message on social media. All those links in the show notes as per usual. I've got a favour to ask. If you've been enjoying the dive, then why not share it with a friend? Don't keep the joy to yourself. Share it, send it, text it to someone else who you think will enjoy the stories we're telling. In the meantime, we're going to be back in your feed on Friday. Thanks so much for joining me today, Darcy. Darcy: [00:14:47] Thanks, Sascha. Sascha: [00:14:48] Until next time.