Why the Shanghai lockdown is important for the global economy

Shanghai, located on the east coast of China, is the largest and richest city in the country and one of the largest metropolitan areas in the world. Together with the neighboring city of Kunshan, which was closed earlier this month, it plays a huge role in the global economy.

While there are no signs that the Chinese government is ready to ease restrictions soon, there are growing concerns about the economic damage they are causing and the shock waves that a prolonged lockdown will cause around the world.

Shanghai is the epicenter of the current Covid outbreak, but it is not alone: ​​Nomura analysts estimate that 45 Chinese cities have implemented full or partial lockdowns, affecting a quarter of the population and about 40% of the economy.

Prime Minister Li Keqiang on Monday warned for the third time in a week about the threat the Covid surge poses to the Chinese economy. Here are three reasons why the rest of the world should keep a close eye on Shanghai too.

Business and Finance

It has the largest GDP of any Chinese city at 4.32 trillion yuan ($679 billion), the third largest stock market in the world in terms of the value of the companies that trade there, and the fifth largest billionaires in the world.

Shanghai is also the most attractive location for international businesses seeking a presence in mainland China.

More than 800 multinational corporations have set up regional or country headquarters in Shanghai by the end of 2021, according to city officials.

Among them are 121 Fortune Global 500 companies, including Apple (AAPL), Qualcomm (QCOM), General Motors (grandmaster), Pepsico (PKP) and Tyson Foods (TSN).
More than 70,000 foreign companies have offices in the city, more than 24,000 of which are Japanese. Japanese government.

With a total market capitalization of $7.3 trillion, the Shanghai Stock Exchange, established in 1990, is second only to New York and London. Trading continues despite the lockdown, but some banks and investment firms are asking employees to sleep at their desks to keep the market running.

The pool of companies registered in Shanghai is largely focused on large state-owned enterprises that play a central role in China’s economy. Among them are the world’s largest liquor manufacturer Kweichow Moutai, banking and insurance giants such as ICBC and Life insurance in China (exercise therapy)and state oil company PetroChina (PKKIF).
The Shanghai Exchange is also home to Nasdaq’s Chinese answer, Star Market.

Trade and logistics

Shanghai accounts for 3.8% of China’s GDP. But it has a much higher share – 10.4% – of China’s trade with the rest of the world, according to official statistics from last year.

The port of Shanghai is the world’s busiest container port. In 2021, it moved 47 million 20-foot units of cargo, four times the volume handled by the Port of Los Angeles. This number accounted for 16.7% of China’s total container traffic. last year.

Shanghai is also a major aviation hub in Asia. The city’s airports, Pudong International Airport and Hongqiao Airport, handled 122 million passengers in 2019, making the city the world’s fourth busiest transportation hub after London, New York and Tokyo.

Lockdowns in Shanghai and other Chinese cities pose a growing threat to the economy.
But the Covid outbreak has exacerbated port delays and forced the suspension of many passenger flights, pushing up air travel rates and putting even more pressure on global supply chains.
The Shanghai port continues to operate, but industry data released in late March showed that the number of ships waiting to be loaded or unloaded has skyrocketed to a record high. State media also informed that many truck drivers struggled to get containers in and out of the port on time due to travel restrictions.

Production and technology

Greater Shanghai area which includes Kunshan and several other eastern cities, is a major manufacturing center for industries ranging from automobiles to semiconductors.

Volkswagen (VLCAF) and General Motors operate factories in Shanghai in partnership with state-owned automaker SAIC Motor. Shanghai is also home to Tesla (TSLA) the first gigafactory in Asia. Last month, the American electric car maker delivered more than 65,000 vehicles from its Shanghai plant. doing it the best-selling electric vehicle brand in China.
In January, Ford opened its sixth global design center in Shanghai. selection the city’s brilliance and a growing number of young Chinese designers who combine “fresh thinking, local knowledge and a global outlook.”
TSMS (TCM), the world’s largest contract chip manufacturer, operates a large semiconductor manufacturing plant in the suburbs of Songjiang. Major Chinese chip manufacturers SMIK (SMITSI)and Hua Hong Semiconductor have factories in Pudong, in the east of the city.
Covid lockdowns cause havoc in the world's largest auto market
But Covid restrictions forced many factories to suspend work in Shanghai and Kunshan, threatening to disrupt key automotive and electronics supply chains.
Volkswagen and Tesla factories in Shanghai are closed for several weeks. Chinese electric car maker Nio has also been forced to halt production due to Covid-related disruptions in Shanghai and other Chinese cities.
Pegatron, key supplier Apple (AAPL), has suspended production at its factories in Shanghai and Kunshan until further notice. In addition, Taiwanese Unimicron Technology, which supplies PCBs to Apple, and Eson Precision, a subsidiary of iPhone supplier Foxconn, which also supplies components to Telsa, stopped production at their Kunshan facilities earlier this month.

“Given Shanghai’s significant trade links with East Asia, this could have spillover effects on regional supply chains,” Citi analysts said in a research note late last week.

“We think Korea, Taiwan, Vietnam and, to a lesser extent, Japan (on vehicles) look relatively unprotected. [to the disruptions],” They said.

Other industries include pharmaceuticals. In October, AstraZeneca (manat) opened a global research and development center in Shanghai.

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