China’s strict COVID-19 isolation policy could cause more trouble than investors may think, global economists predict, according to CNN.
The nearly 400 million people locked down in 45 cities nationwide represent 40% or $7.2 trillion of China’s annual gross domestic product, according to data from Nomura Holdings. Without their participation in the country’s economy, the global fallout could be severe and enduring.
"Global markets may still underestimate the impact, because much attention remains focused on the Russian-Ukraine conflict and U.S. Federal Reserve rate hikes," Lu Ting, Nomura's Chief China Economist, wrote in a note last week.
The quarantine has left much of the country’s manufacturing industry at a standstill. For example, the port at Shanghai, an export hub which managed 20% of the country’s freight traffic in 2021, is understaffed. As a result, food is rotting in shipping containers, and incoming cargo sits for eight days before heading elsewhere. No new containers are being sent to the docks from warehouses, according to supply chain visibility platform project44.
Additionally, cargo planes have cancelled flights into and out of the city of 25 million people, and more than 90% of delivery trucks have ceased operation. Factories are closing and further exacerbating supply chain issues.
"The impact on China is major and the knock-on effects on the global economy are quite significant," said Michael Hirson, Eurasia Group's Practice Head for China and Northeast Asia. "I think we're in for more volatility and economic and social disruption for at least the next six months."
Sony and Apple supplier plants in and around Shanghai are shut for now, and MacBook manufacturer Quanta has stopped production completely at its Shanghai location, which makes about 20% of the company’s notebooks. Tesla, which had produced about 2,000 electric cars daily, has closed its Shanghai Giga factory. During the shutdown, the factory's longest in its three years of operation, the automaker has lost more than 50,000 units of production, according to materials reviewed by Reuters.
China's isolation measures may cost at least $46 billion in lost economic output per month, or 3.1% of GDP, according to the Chinese University of Hong Kong.