Shanghai’s ‘murky’ Covid outbreak threatens another disruption to global supply chain | Chinese economy

The Covid-19 outbreak in Shanghai remains “extremely grim” as the ongoing lockdown of China’s financial powerhouse threatens to devastate the country’s economy and severely disrupt already sprawling global supply chains.

As Shanghai announced another daily record high of 16,766 cases on Wednesday, the director of the city’s disease control working group was quoted by state media as saying that the city’s outbreak “is still progressing at a high level.”

“The situation is extremely grim,” said Gu Honghui.

Although low by international standards, this is China’s worst outbreak since the virus took hold in Wuhan in January 2020 and sparked the global pandemic.

Shanghai’s entire population of 26 million is now under lockdown, and discontent is growing among those who have been living with restricted movement for weeks as authorities stubbornly cling to their zero-Covid policy to eradicate the disease.

At least 38,000 medical personnel have been deployed to Shanghai from elsewhere in China along with 2,000 military personnel, and the city is conducting mass testing on residents.

A separate outbreak continues to rage in the northeastern province of Jilin, and the capital Beijing has also seen nine other cases. Workers shut down an entire mall in the city where a case had been discovered.

There are increasing signs that China’s economy is slowing down sharply due to the lockdowns. Activity in China’s services sector contracted at its sharpest rate in two years in March as a surge in cases restricted mobility and weighed on demand. The closely watched Caixin Purchasing Managers’ Index (PMI) fell to 42.0 in March from 50.2 in February. A drop below the 50-point mark separates growth from contraction.

The same survey last week showed a contraction in the country’s huge manufacturing sector, and economists warned on Wednesday things could get worse as the lockdown in Shanghai begins to affect figures for the coming months.

Capital Economics’ Alex Holmes said the impact of the Covid outbreak in China on the rest of Asia has so far been relatively small, but “the possibility of major disruption to supply chains remains a major and growing risk”.

“The longer the current wave lasts, the greater the opportunity,” he said.

“An additional risk factor is that after many months of disruption, global supply chains are already very stretched along their entire length. There is now a much greater potential for a small bottleneck to have a big impact.”

Two years of disruption from the pandemic has disrupted the global economy’s complex supply chains, leading to sharp increases in the prices of commodities, food and consumer goods.

The war in Ukraine has increased inflation, particularly in oil and grain prices, and further shutdowns in China could worsen the situation.

Supply-side tensions in Asia-Pacific will remain elevated at least until the end of the year, with energy and commodity cost inflation the top cost pressures for corporate bond issuers, followed by the impact of transportation shortages, according to a new report from Moody’s Investor’s Service.

“The Russia-Ukraine crisis and ongoing pandemic-related disruption will hold back the supply-side recovery despite early signs of a gradual recovery in Asia-Pacific,” said Lillian Li, senior credit officer at rating agency Moody’s.

“All corporate sectors in the region will face varying degrees of cost risk from supply side pressures at least through the end of this year.

It comes amid a warning from a top central bank governor that the global economy could be on the brink of a new inflationary era, in which consumers will face persistently higher prices and rising interest rates as globalization retreats. Agustín Carstens, head of the Bank for International Settlements, said higher interest rates may be needed for several years to combat inflation, which is 6.2% in the UK.