The global economy is facing a new threat again

Trường Lăng

May 13, 2022


The global economy is facing a new threat again

Trường Lăng

May 13, 2022

The blockades to prevent the spread of the Covid-19 epidemic in China are disrupting the supply chains, affecting the global economy. The situation is assessed to be worse than the beginning stage of the pandemic in early 2020.

Truck driver Meng Hong has become a social media star in recent weeks when he posts short videos about street life during the Covid-19 outbreak on the social network Douyin – the Chinese TikTok version. These videos attract millions of followers. 

Most of Meng’s videos are “positive energy transmission” as he wrote in his account description. However, on April 13, he began to complain about the problems when transporting goods to Shanghai. “Arriving in Shanghai for delivery of goods, we were forced to quarantine after leaving Shanghai or staying in Shanghai,” he revealed in a video clip.

When China’s most populous city begins a strict blockade during this month, the local authorities in the neighbouring areas have erected the roadblocks and closed highways to limit the potential spread of the Omicron variant, resulting in the disruption of the logistics chain.

“If you’ve been to Shanghai, you could not enter into other cities, “Meng complained and said that all drivers refused the trips to Shanghai.

Meng’s post resonated across China and reflected a miniature model of the instability that the world’s second-largest economy is currently coping with. China’s zero-Covid policy has put at least 45 cities of this country under some forms of blockade and Beijing shows no sign of the plan change in its efforts to eliminate the spread of the virus.

All international companies are completely closed 

China is experiencing its worst Covid-19 outbreak during the past two years as the BA.2 sub-variant of Omicron sweeps across the country. Following the controversial zero-Covid policy, the Chinese government strengthens the blockade measures in many cities, including such major manufacturing hubs as Shanghai and Jilin province to the northeastern.

Shanghai (China) has been locked down since the end of March (Photo: Bloomberg).

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

According to the city government, by the end of 2021, more than 800 multinational corporations have established their regional or national headquarters in Shanghai. In which, 121 companies are on the list of Fortune Global 500, including Apple, Qualcomm, General Motors, Pepsico and Tyson Foods.

More than 70,000 foreign companies have offices in this city, of which more than 24,000 are Japanese companies, according to the figures from the Japanese government.

Shanghai and Changchun – the capital of Jilin province, are the home to the two of China’s leading automobile manufacturing factories, SAIC Motor and FAW Group. In the normal time, through joint ventures with Western automakers, the two companies, SAIC Motor and FAW Group have manufactured millions of vehicles branded General Motors, Volkswagen, Toyota, BMW and others to China market.

In Shanghai, SAIC Motor has about a dozen of foreign-brand automobile factories, and the city is also home to Tesla’s Gigafactory 3. Meanwhile, Jilin province has 14 factories owned by FAW Group.

Most of these factories have been locked down since March under the blockade command of the local Covid-19 epidemic prevention and control department.

Volkswagen said that its factories in Shanghai and Jilin have been locked down for many weeks and Volkswagen has been “assessing the situation from day to day”. Toyota said that its factory in Jilin has been locked down for a month. 

In Shanghai, Tesla’s Gigafactory 3 is expected to manufacture at least 30,000 electric vehicles behind the plan. Chinese electric vehicle competitors are Nio, Xpeng and Li Auto have also ceased production. 

Tesla’s Gigafactory 3 in Shanghai has been locked down for more than a month (Image: Electrective).

During the first 2 weeks of April, about 94% of automobile manufacturers in Shanghai and surrounding areas experienced challenges in manufacturing due to the blockade, according to the report of Goldman Sachs published on April 14.

In addition, China is also the leading country that provides the countries with mobile phones and laptops. As factories and ports closed due to the blockade, such companies as Apple and Dell will likely cope with slower-than-planned product completions.

Taiwanese computer manufacturer Quanta, which manufactures about 75% of Apple’s Macbooks globally, has temporarily locked down in Shanghai. Another Apple supplier in the region, Pegatron, which assembles former iPhone models, has also suspended its manufacture. 

Supply disruption due to delivery delay

China accounts for about 12% of global trade. All manufacturers in China are locked down due to the strict blockade resulting in the world’s supply disruption. Warehouses shut down, truck deliveries are delayed and containers piled up at warehouses.

Containers are piled up at Shanghai port (Photo: The Economic Times).

Said to Kyodo newspaper, Kazuya Sekiguchi, a 43-year-old marketer of a Japanese electronic equipment maker in Beijing: “Due to business activities in Shanghai are almost suspended. We might encounter a dual problem caused by the supply chain disturbances and China’s economic slowdown.”

Supply chain concerns are increasing as Shanghai – the home of the world’s largest container port – is coping with the strong spread of infections. Shanghai Port is the world’s busiest port in terms of container traffic. It shipped 47 million containers in 2021, as much as four times the volume of containers handled at Los Angele Port. This figure accounted for 16.7% of China’s total container shipments last year.

However, the Covid-19 outbreak has made the delay at the port worse, the freight rates skyrocketed and put more pressure on global supply chains.

In 2021, Shanghai’s foreign trade gained a record of more than 4 trillion yuan ($638 billion), accounting for more than 10% of China’s total turnover. Shanghai has also been the world’s largest container port for 12 consecutive years, according to Chinese state media.

“Shanghai’s blockade has seriously impacted the global supply chains through logistics,” said Daisuke Takahashi, a researcher with Japan Trade Promotion Organization in Shanghai. “If the blockade lasts longer, the impact will be more serious,” said he.

Shanghai port is still operating, meanwhile, industry data released in late March showed the quantity of vessels waiting for loading or unloading cargo has spiked to a record level. Many truck drivers are reported by Chinese media to have struggled to get the containers in and out of the port on time because of travel restrictions.

“It’s a challenge. Longer delivery times, delayed shipping,” said Cameron Johnson, head of the Asia-Pacific region at FAO Global.

According to Josh Brazil, the senior vice president of supply chain at Project 44 who is in charge of tracking the global supply chains, the problems in Shanghai resulting the delay in shipments to Europe.

Josh Brazil told Sky News that “We see the delay in forwarding activities at the major ports like Hamburg and Rotterdam. In major European ports, the delivery of goods may be delayed 10-12 days.” 

One-fifth of container vessels are being blocked at the global ports, with 30% of the blocked cargoes coming from China. Lars Jensen, CEO of Vespucci Maritime told Fortune that the situation will become more severe in the coming weeks.  

“Until now most vessels can come over Shanghai as normal. But this might change in the coming weeks if the blockade command is not removed. Then, the cargo vessels are not able to dock in Shanghai and the shipments will be cancelled. Thereof, the impact on the supply chain will increase,” said Jensen. 

Nền kinh tế toàn cầu đối mặt với mối đe dọa mới - 4
Trucks stopped for testing and disinfecting, resulting in congestion and delayed delivery (Photo: Bloomberg).

Even though the strict banning commands in Shanghai are removed, US ports are forecast to be impacted by the wave of blocked cargoes from the newly reopened factories in China. Thereof, the freight rate will be higher as well as the congestion at ports around the world will be serious, said Jensen.

Global Economy Challenges

For many weeks, economists have expressed their concerns about China’s zero-Covid strategy challenges posed to the world economy, according to Forbes. They think that this strategy has made up a miracle in 2020, but nothing matched the case of Omicron and its variants that may be available later. It is even worse because this strategy has backfired for Asia’s biggest economy and the world’s second-biggest one.  

The new blockades in Shenzhen, Shanghai, and other places are causing serious problems. The blockade zones account for about 40% of China’s GDP, or about USD7.2 trillion, said Lu Ting, an economist at Nomura Holdings.

“The global markets may still be underestimating the impact of the Covid-19 epidemic in China because they pay more attention to the Russia-Ukraine conflict and the US Federal Reserve System’s raising interest rates,” said Mr Lu.

The prolonged blockades in China have challenged the global economy (Photo: Kyodo News).

Many cargoes are stuck in China due to the blockades and this might become a “serious problem” for the global economy, said the business consultant, Richard Martin.

“Many things being used by us are made or contain the components made in China. During the 2020-2021 epidemic period, we also see a logistical crisis that took everything down,” told CNBC Mr Martin, Managing Director at IMA Asia.

“China accounts for 20% of the global demand, their role, however, in the supply chain is more important than that,” said he.

Since the early months of the pandemic, the global economy has coped with the supply chain challenges because of a combination of factors, such as logistics services struggling to keep up with trade volumes, a surge in Covid-19 infections in Asia regions, risk of disrupting the flow of cargoes.

European manufacturing enterprises in the Shanghai region are facing difficulties because of supply disruption, said Bettina Schoen-Behanzin, Vice President of the European Union Chamber of Commerce in Shanghai.

“In the term of the permanent impact, this problem shall seriously impact the world economy and inflation will definitely pick up,” she told Sky News, “We don’t know how long this blockade will last and this is an important question. The most important thing for us to find the settlement way as the blockade command may be extended to other production centres due to China’s zero-Covid policy.” 

Chinese government’s actions

The Chinese government has announced that they will take action to help the supply chain return to the normal situation, reported Reuters.

To stabilize the supply chain, China’s Ministry of Industry and Information Technology said they would work with 666 manufacturers of semiconductors, automobile, and medical sectors in Shanghai.

Chinese Vice Premier Liu asked the appropriate authorities to provide the confirmed drivers with driving permits and deal with the delivery delays caused by the pending time for Covid-19 tests.

“We should resolve each outstanding problem in the key regions, and the Government will make a ‘white list’ of key industrial enterprises that need the help,” said Liu.

The Chinese government’s action makes the manufacturers and transporters feel secure. The container transporting industry will increase sharply after the Covid-19 situation in this country eases said Mr Tim Huxley, the founder of Mandarin Shipping.

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China – is the World’s second-biggest economy (Image: Daily Mail).

Although it may take a while for things to return to the normal situation, the problems will “quickly” be resolved like China’s miraculous recovery from the Covid-19 epidemic blockade in 2020, told CNBC by Mr Huxley.

China needs to stand firm to lead the growth. The global economy is becoming increasingly integrated, and any change in public health, geopolitics, and the macroeconomic environment caused by the pandemic, Ukraine crisis and increased inflation in the US will impact China’s growth prospects.

As China is the world’s second-biggest economy, its consistently strong growth is important, not only favourable for China itself, but also for many other countries.

How do you navigate yourself through an uncertain economy? It is better to have a top-notch expert by your side. Please reach out to Viettonkin if you are struggling with the process of starting up a company. Having a dedicated firm by your side lets you focus on what matters – running your business!

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