Shenzhen meltdown highlights China’s crisis

Economic turmoil has left China’s power cities desperately searching for the “on” switch.

Beijing, Shanghai and Shenzhen have been battered by Covid-19 lockdowns, rising costs, and a sharp decline in consumer confidence.

Of the big three, Shenzhen is startling to look distinctly vulnerable. 

Created from a coastal backwater in the 1980s, President Xi Jinping called it a “Miracle City” during a visit to the high-tech manufacturing metropolis in 2019.

But now Shenzhen is being hit by the aftershocks of Xi’s “zero-Covid” strategy and spiraling shipping costs on the back of soaring energy prices.

“Shenzhen’s economy is faltering, leaning back, and sluggish, while some are doubting if Shenzhen has enough momentum,” Song Ding, a director at the state-linked think tank China Development Institute, wrote in a May essay as reported by the Reuters news agency.

Between the lines:

• The city of 18 million has recorded 20% annual growth during the past 40 years.
• In the first quarter of 2022, it dipped to 2%.
• Overseas shipments from China’s biggest exporter fell nearly 14% in March.
• Since then, shipping costs have exploded.
• Fellow top-tier cities such as Shanghai and Beijing have also seen growth strangled.

Lockdowns in Shanghai and Beijing have also wreaked havoc. But that is only half the story.

Delve deeper: Major companies in Shenzhen have become major casualties. High-tech giants Huawei and ZTE are still reeling from the shockwaves of US sanctions. As for property juggernaut China Evergrande, it nearly collapsed last year under the weight of colossal debt, triggering fears of a financial crisis.

Big picture: Lockdowns in Shanghai and Beijing have also wreaked havoc. But that is only half the story. By mid-April, nearly 400 million people were forced into lockdown protocols to protect a badly-funded healthcare sector and low vaccination rates among the elderly.

Economic costs: Factory activity was again in negative territory in May compared to the same period in 2021. Unemployment also surged with the jobless rate among those aged between 16 and 24 hitting a record-breaking 18.2% in urban regions.

The fallout: “One of the direct results of the recent pandemic surge and lockdowns seen in Shanghai and other cities is the acceleration of both foreign and Chinese companies to relocate manufacturing outside of China,” Earl Carr and James Hinote, of consultancy CJPA Global Advisors, wrote in a commentary for China-US Focus last month.

China Factor comment: As we reported in May, the world’s second-largest economy is now in “intensive care.” Nothing much has changed since then, despite Beijing’s emergency stimulus transfusion.