Shanghai plots path out of lockdown, but supply chain bottlenecks could last through the year

A severe lockdown lasting more than two months that crippled manufacturers such as Tesla may finally be coming to a gradual end as Shanghai hopes to emerge from its worst-ever COVID outbreak in June. 

In what is seen as the clearest timetable yet, deputy mayor Zong Ming announced a staged reopening with restrictions in place to guard against a sudden resurgence.

“From June 1 to mid- and late June, as long as risks of a rebound in infections are controlled, we will fully implement epidemic prevention and control, normalize management, and fully restore normal production and life in the city,” she said, according to Reuters.

An easing of restrictions would finally bring positive news for the global economy as half of the world’s 20 largest ports are located in the country.

According to research firm Resilinc, shipping one container from China to the West Coast now costs roughly twice as much as it did a year earlier and 344 ships were stuck at the Shanghai port, a 34% increase over March. 

China’s zero COVID policy has led to a substantial decrease in traffic at ports as well as a sharp drop in production output.

The damage doesn’t stop there, either. Business activity in the country’s services sector came in at its lowest pace since February 2020 at the height of its first wave. 

“The ripple effect of the current Chinese backlog might last till the end of 2022 and beyond,” Resilinc said in an analysis published earlier this month.

Rethinking investments

The repercussions have already spread across the globe, with multinationals from Apple and General Electric, to Amazon and Adidas warning of disruption to their supply chains due to the lockdown of a city that handles 20% of China’s international trade.

Elon Musk’s Tesla has been hit especially hard as its massive Shanghai factory meets both domestic demand and serves as an export hub for European markets. Last month however production cratered due to the lockdowns, with output plunging to 10,757 vehicles, an 81% drop compared with March according to industry figures. 

In a survey published on May 5th, the European Union Chamber of Commerce in China said member companies were “overwhelmed by logistical and supply chain challenges”.

Not only did they report problems transporting raw materials and components to their factories, but they also struggled to ship finished goods to customers overseas. 

It cited data that shows the volume of goods leaving Shanghai’s port dropped by a quarter between mid-March and early April due to the lockdown, while the country’s road-bound freight traffic fell by 40% over the same period. 

As a result of the draconian lockdowns, nearly 23% of European companies in China surveyed are reconsidering whether to shift planned investments to another country, more than double the number just two months ago, and the highest recorded in the past decade.

“While the Shanghai lockdown is slowing export growth in China, declines in trade appear to be confined to the port of Shanghai,” said Vincent Stamer, from the Kiel Institute for the World Economy in Germany.

Nevertheless, the EU Commission on Monday slashed its forecast for growth in the 27-member state bloc as well as the euro area this year and next, citing the supply chain bottlenecks hampering trade and production in addition to the war in Ukraine.

The lockdowns come at an inopportune time for Xi Jinping. Images of China failing to gain control over its Omicron wave has created fissures in the Communist Party’s monolithic façade just months before he seeks an unprecedented third term as president.

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