China COVID – Understanding The Impact…

China has experienced the largest COVID outbreak since 2020.?Although the infection rates and numbers are small in comparison to Europe and North America, the Chinese response is highly likely to impact Chinese and global business in the months ahead.

Presently, more than 50 million Chinese are in some sort of lock-down, controlled management or quarantine. Shanghai just announced that half the city will be locked down and undergo immediate testing, with the second half of the city starting the same process on April 1. Simply put, these people can’t go to work. That might be manageable for some service businesses, such as my company, where we have been working from home for two weeks, but in other types of businesses, no employees on the job means the business can’t operate.?This is deeply impacting manufacturing, transportation, logistics and distribution. These industries in turn impact virtually all business. Retail, delivery, food and beverage, manufacturing, agriculture; without transport and logistics, all business will stop and when it comes to China, this quickly impacts the world.

Manufacturers across China are preparing their factories to operate as highly isolated “bubbles” that can continue to run for weeks even during tough government-ordered lockdowns. Recent lockdowns in the southern Chinese manufacturing and technology hubs of Shenzhen and Dongguan have shut down many factories and disrupted already overstretched global supply chains. Despite the strict restrictions, some plants in southern Guangdong province are able to get official permission to continue operating as long as workers do not leave their premises, essentially requiring them to work as socially isolated bubbles.

Bosch Unipoint, one of the world’s biggest car part manufacturers, is able to maintain production at its factory in Longgang District in Shenzhen because about 200 workers agreed to live at dormitories on site during a week-long lockdown this month.

Bosch Unipoint has now launched similar preparations at plants in other cities to cope with potential future lockdowns. The company aims to ensure that its brake pad factory in eastern Nanjing city, which has 500 employees, will operate for four weeks even in a lockdown as strict as Shenzhen’s.

The preparations underscore expectations among businesses in China that the country’s tough pandemic restrictions will continue in some form until at least next year. ?Workers from many places across China have in recent weeks shared photos and videos on social media of their experience living on-site at factories during local Covid-19 lockdowns. In Shanghai, where there have been localized movement restrictions on individual residential compounds, some workers have opted to sleep on factory floors in order to make sure they can get to work and so continue to get paid. But accommodating workers on site has prompted a backlash, with some Chinese internet users voicing concern about employees being forced to live in substandard conditions for extended periods on company campuses.

On the transportation side, since China continues to be the world’s largest exporter, surging ?port congestion across China, rising Covid cases and lockdowns in Shanghai have also caused additional cargo delays.

Some restrictions in Shenzhen were lifted this week, allowing factories to re-open ahead of schedule and help dampen the supply chain impact. However, cargo operations are not yet back to normal, with most container freight stations in Shenzhen not operating, or operating very slowly due to lack of staff.

?In Shanghai, China’s zero-Covid policy is in full force. With new city-wide lockdowns initialed, while the ports are operating they are short-staffed and backlogs and congestion are building rapidly

To leave Shanghai, truck drivers require a PCR test within 48 hours, and again to re-enter the city.

Outside of Shanghai, in Jiangsu province, they have their own requirements for entering the province.?Within Jiangsu, the cities each have their own requirements for entering their territory.?In many cases, shippers are doing their local trucking themselves as it’s much easier for a local trucker to leave and re-enter the city.

In Shenzhen the situation is similar, but more severe in regard to trucking, as it’s now almost impossible to get any truck in Shenzhen city to pick up empty equipment and deliver to the port.

?Ports are also getting congested. Yantian and Shekou were experiencing longer waiting times. According to?Bloomberg, there are 174 vessels anchored or loading across South China – the most since October when the region was affected by typhoons.

Shipping analyst Linerlytica recently reported Chinese ports had seen a “sudden surge” in vessel congestion over the past week, resulting in all-time highs in global port congestion of 3.58 million twenty foot container equivalates.??- 14.1% of the total global fleet.

Linerlytica added: “In North China, congestion at Qingdao has seen increased vessel waiting times of two-to-five days. Lower port productivity and dense fog have contributed to congestion that is the worst seen in the Bohai region since 2020.

“Congestion has also built up at Shanghai and Ningbo, with dense fog forcing several terminals to shut over the past week.

“Restrictions on truck movements have impacted trucking services for container pick-up and delivery, and this has impacted yard productivity especially in Qingdao, Shanghai and Shenzhen.”

Getting these ports and transportation systems back in order is now a top priority for the government and in many ways might be the impetus for easing certain zero-COVID policies in China.

Over the past two-plus years, China's dynamic zero-COVID policy, featuring swift response, mass screening and large-scale vaccination, has prevented mass deaths at home but also generally ensured that factories can deliver products ranging from face masks to Teslas to consumers worldwide.?Now, that policy is in question as the impact is being belt wide and deeply.?There will need to be a balance.

In 2021, for example, China's foreign trade value exceeded 6 trillion U.S. dollars for the first time despite the epidemic continuing to weigh on global trade.

Had it not been for China's manufacturing capacity and continuous flow of commodities, shortages of goods would have bitten into essentials, nudging up retail prices in Walmart and Tesco stores and increasing inflation, thus impeding the already shaky global economic recovery.?The potential for this to happen in the coming months is very much alive at the moment.

From a locking down Shanghai…..?be well and be safe.

Alexander Glos