Frozen 2: The cold reality of the Shanghai lockdown

Here we go again. Just as we thought the worst of the COVID-19 pandemic was over, it has reared its ugly head. For January 2020 Wuhan, read April 2022 Shanghai. The same harsh restrictions and rigid enforcement in a bid to keep the disease at bay. Overzealously, some may say.

The result? Frozen supply chains and economic gridlocks – a sequel to what transpired before. Except this time, it is Shanghai, probably China’s most vital port hub, that is paralysed. The consequences of this could be a Chinese economy left in the cold by the world, stranded in a deep economic winter. Are the supply chain disruptions and reputational risks worth the zero-COVID policy?

CHILLING IMAGES

As the city of 25 million saw cases reach the tens of thousands daily in April, the Chinese authorities enforced a full lockdown to curb the spread. It comes with severe humanitarian consequences.

Shocking images have made their rounds, whether it’s COVID-positive toddlers – separated from their parents – crowding a single hospital bed, or government officials decked out in full protective gear boarding up home doors to keep inhabitants inside.

While the government has delivered grocery packages to households every week or so, it is barely enough. Worse still, some have not received their share. People are going hungry while imprisoned in their homes in the glittering financial capital.

There are also business owners being hit financially, losing tens of thousands of dollars in rental without any financial assistance from the state. The simple act of applying for a visa, once a straightforward procedure, is now being dragged out as civil servants stay home.

COOLING RELATIONS

China’s handling of this crisis could leave a severe dent in its reputation. Foreign companies in Shanghai are feeling the pain. Routine processes such as remitting money are stalled as employees cannot go to the office or banks for approvals to be made.

As a result, some companies have to pay late fees. For many, their suppliers overseas are becoming sceptical about whether the lockdown is just an excuse to delay payment. Trust is being eroded and friction is growing in these prickly times – between the local government and businesses, businesses and employees, and businesses across borders.

On April 8, Jorg Wuttke, President of the European Union Chamber of Commerce in China, penned a letter on behalf of the chamber to China’s Vice Premier Hu Chunhua. “This (the stringent measures) is having an unfortunate impact on China’s image to the rest of the world while eroding foreign investors’ confidence in the Chinese market,” he wrote, highlighting how, for example, half of German companies’ logistics, warehousing and supply chains are completely disrupted or severely impact by the COVID-19 measures in China.

Slowly but surely, news of China’s severe measures – such as killing pet dogs of infected owners – are tarnishing the country’s image and chipping away at investor confidence. The world’s focus was for a while trained on the Russia-Ukraine crisis, but now news editors are gradually filling pages with news on China’s COVID-19 policy.

FROZEN SUPPLY CHAINS

It only makes sense that a frozen Shanghai should matter to the rest of the world. Afterall, it is the Asian giant’s largest port.

With ships unable to unload and pick up cargo, concerns swirl over the plight of global trade. For example, India sources 70 per cent of its active pharmaceutical ingredients from China, and the lockdown is threatening such supplies.

International supply chains of products from automobiles and aircraft to semi-conductors and shoes are being impacted by the lockdown. Tesla’s China plant in Shanghai has been shut for weeks now.

The situation is direr for traders of perishable goods. For the orange juice business, the “liquid gold” from Brazil remains in warehouses as we are unable to get the juice outside of Shanghai where our bottling plants are. Images of container trucks throwing out fresh vegetables along the highway have also been circulated.

This will definitely not help food inflation, especially as fertiliser costs rise due to the Ukraine situation.

A THAW ORDER

The full economic impact of the drastic COVID-19 policies is yet to be seen. There are some early signs that the Xi Jinping administration may lighten the stance, but it is uncertain if there will be a definitive U-turn from the zero-COVID policy.

In the meantime, the economic gridlock may force foreign importers to seek alternatives in production plants or consumer markets. The biggest winners could be Asian neighbours like Vietnam, Cambodia or Thailand, which offer open economies and low costs. Chinese firms may also hasten their “going out” plans and invest more overseas.

For now, however, many enterprises like us are in survival mode, hibernating in the cold winter as we await the green shoots of reopening.