China’s economy faces fresh blow from COVID lockdown in Shanghai

SHANGHAI’s sweeping, two-phase lockdown will likely deal a heavy blow to businesses reliant on consumer spending, though economists say the city’s industrial sector can largely withstand the disruption, mitigating threats to the global supply chain.

The staggered eight-day lockdown in Shanghai — a city of 25 million people — and lingering effects from the measure may shave up to 0.4 percentage point from China’s economic growth in the first and second quarter, compared to a year ago, according to estimates by Liu Peiqian, China economist at NatWest Group Plc.

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

“COVID suppresses people’s confidence and expectations for spending,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong. He also pointed to impacts on industries that rely on in-person and social gatherings, especially catering.

Liu, whose forecast for gross domestic product (GDP) growth in the first quarter is 4.7%, said the “gradual recovery” of the services and consumption sectors could take eight weeks. As a major financial and trade hub, Shanghai contributes 3.8% to the country’s GDP. It’s also the second-richest city, trailing only Beijing, according to the latest available figures from the National Bureau of Statistics.

The impact on the supply chain will likely be temporary as long as the lockdown doesn’t last longer than three weeks, according to Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd.

He said a so-called closed loop system tested in Shenzhen — where factory workers are living in dorms, working in a bubble separate from the general public — has lessened the impact on the economy. The southern technology hub of Shenzhen resumed normal operations Sunday, about two weeks after the government placed its 17.5 million residents under lockdown.

“Similar to Shenzhen, Shanghai is the economic powerhouse of the country,” Mr. Yeung said. “The scale is obviously larger but the action is swift, hoping to minimize the economic impact as soon as possible.”

The Shanghai port, the world’s largest, is still operating around the clock, according to local media reports. Chinese chipmaker Semiconductor Manufacturing International Corp is maintaining normal production at its facility in the city, and is complying with Covid prevention measures.

Tesla, Inc., meanwhile, suspended production Monday, Bloomberg News reported. The American carmaker hasn’t yet informed employees whether that halt will be extended.

Larry Hu, an economist at Macquarie Capital Ltd., said policy makers will have “no choice but to step up stimulus in the coming months” in order to meet a GDP growth target of about 5.5% this year.

“We maintain our annual GDP forecast of 5%, as more policy easing would come through,” he said, predicting a benchmark interest rate cut in April, as well as more support for infrastructure and property sectors. — Bloomberg