Shanghai euphoria tempered by deep wound to Chinese economy

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Hangzhou (China) (AFP) – Orders evaporated at Zhou’s textile business based just outside Shanghai, a city now breaking free from a two-month lockdown that has left small businesses on life support.

Sales are on “a very serious downward slope” and layoffs are imminent at his factory, owner Zhou told AFP, asking that his company not be identified.

The company is based in Zhejiang province, the antechamber to Shanghai’s cavernous consumer and manufacturing market.

It’s one of tens of thousands of small businesses clinging to life as China’s strict zero Covid policies lead to a crippling economic downturn.

Shanghai, a city of 25 million, is the hub of countless supply lines that radiate down the country’s east coast, including Tesla cars and iPhones.

For Zhou, survival will be his only thought over the next two months in an economy whose growth forecasts have been downgraded by rating agencies.

“I’m going to have to lay people off,” Zhou said, as he sought customers to fill his order book.

Chained Supply Chains

Beijing is tied to a strategy of eliminating Covid outbreaks through tough lockdowns and mass testing, even as most of the rest of the world has chosen to live with the virus.

It has closed factories, disrupted logistics and reduced travel to almost zero for weeks in major manufacturing hubs, including Shenzhen and Shanghai, home to the world’s busiest container port.

Tesla’s Shanghai factory is among many companies based in the city to feel the effects of hampered supply lines HECTOR RETAMAL AFP

Nationwide factory activity fell to its lowest level in two years in April after Shanghai shut down its 25 million people at home while multiple outbreaks sparked by Omicron bubbled up elsewhere, the activity continuing to decline – albeit at a slower pace – through May.

The slowdown has suffocated entire supply lines.

“Factories, stores and downstream businesses are all affected,” Xu Xuebing, owner of Shanghai-based timber supplier Sam Wood, told AFP.

“The impact is significant… I haven’t even (tried) to assess how much I lost during the lockdown,” Xu said, adding that he hopes the next two to three months can see a bounce.

Shanghai’s lockdown has calcified businesses across China, analysts say, fearing new virus clusters could once again see whole swaths of the country plunged into lockdown.

“Continued uncertainty” is bad for business confidence, Peiqian Liu, China economist at NatWest Markets, told AFP.

– Constant uncertainty –

Reopening also does not guarantee a full recovery, warned Zhaopeng Xing, senior strategist for China at ANZ Research.

Shanghai barricades are demolished as freedom of movement is restored in the city
Shanghai barricades are demolished as freedom of movement is restored in the city Hector RETAMALAFP

“Mobility within Shanghai is lifted,” Xing said.

“But the restrictions when you go out of Shanghai are still there.”

“Many logistics problems have not been 100% restored to previous levels,” Xing said, adding that “the losses of the past two months” would not be easy to recover.

Spooked by the unpredictability and harshness of Shanghai’s lockdown, foreign companies have also raised fears about their future in China.

Meanwhile, experts say small businesses will be reluctant to hire “due to the uncertainty in the business environment from future lockdowns,” Iris Pang, chief economist for Greater China, told AFP. at ING.

China’s urban youth unemployment rate hit 18.2% in April, according to the National Bureau of Statistics.

Stay alive

Weak economic indicators have alarmed Chinese authorities, who are now rushing to boost confidence and support struggling sectors.

The central government said it would offer tax relief and a bond campaign to help industries while increasing government procurement from small businesses.

But analysts are cautious about China’s growth in the months ahead, with Moody’s lowering its annual growth forecast to 4.5% on Monday.

Beijing is likely to “distribute its stimulus measures as quickly as possible,” said Natixis economist Gary Ng.

“But the rebound may not come in the third quarter of 2022 and it is unlikely to see a big change in Covid-19 policy before the end of the year,” he added.

For Zhou, the textile manufacturer, survival trumps profit in a zero Covid China.

“I don’t need to make more money than my competitors, but I need to be able to outlast them during this tough time,” he said. “That’s my short-term plan.”

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