Factory chaos puts the brake on China’s economy

Omicron outbreak leaves nearly 400 million people under lockdown as Shanghai crisis spreads across the country

China’s economy has not just stalled. It is on the brink of going into reverse gear.

As Shanghai’s Covid-19 lockdown enters its third week, the country’s national logistics network is grinding to a halt.

Other major cities are feeling the fallout from the highly-contagious Omicron wave, driving a massive hole through the manufacturing sector of the world’s second-largest economy.

Nearly 400 million people are estimated to be under various lockdown protocols, which could wipe out China’s growth estimates of 5.5% this year, according to media reports.

The latest industrial casualty appears to be the car industry.

“Automakers in China may have to suspend production in May if suppliers in Shanghai and surrounding areas are not able to resume work,” He Xiaopeng, the head of Chinese electric-car company Xpeng, said on Twitter-like WeChat, as reported by Reuters news agency.

State of play:

  • The situation is deteriorating fast.
  • Telsa, for example, is already “feeling the pain of limits” on manufacturing.
  • More than 40,000 models have been lost since production was suspended at its Shanghai super factory in late March.
  • Rival Chinese brand Nio is also facing cutbacks at its Hefei factory because of supply chain problems.
  • Yet the electric car sector is not the only industry fearing a meltdown.
  • A shortage of high-tech components, such as semiconductors, is stifling the manufacturing of products as diverse as smartphones, smartTVs and smartcameras. 

All technology and industry firms would have to stop production in May if their suppliers are in Shanghai.

Richard Yu, the CEO of tech giant Huawei’s Consumer Business Group

What that means: “All technology and industry firms would have to stop production in May if their suppliers are in Shanghai,” Richard Yu, the CEO of tech giant Huawei’s Consumer Business Group, warned as reported by state-owned Securities Times on Friday.

Delve deeper: “The Shanghai lockdown is having major economic knock-on effects through its impact on a crucial link in the logistics system – truck drivers,” Ernan Cui, a consumer analyst at the research group Gavekal Dragonomics in Beijing, said earlier this week.

Truckstop: “Cities across China have deployed a wide range of public-health restrictions as they try to block the spread of infections from Shanghai. One of the most common practices is for cities to tighten border controls [that] impact long-distance truck drivers,” Cui wrote.

Abnormal activity: “One measure of nationwide truck traffic is already down about 40% from mid-March. Activity around Shanghai is a mere 15% of normal levels,” Cui pointed out. 

Snarl up: “The central government is now trying to clear up these transportation snarls. But a full recovery is impossible until more cities relax their border controls, which is unlikely before the end of April,” Cui said.

China Factor comment: Just like the rest of the world, China is being battered by rising commodity costs, such as energy and food. But now, the Omicron outbreak is infecting the DNA of the country’s economic heartland.

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