The month-long-plus lockdown in Shanghai is the epicentre of the economic disruptions. New infections are declining, but more than 40% of residents are still prohibited from leaving their homes, disrupting logistics.
In the manufacturing sector, new orders and production declined, while prolonged procurement times for parts and raw materials have taken a toll.
The effect is being felt beyond China. Japanese companies are also struggling to cope with the situation.
The impact has been felt by Japanese companies in a wide range of industries. Yaskawa Electric, a major industrial robot supplier, has kept its Shanghai inverter factory shut since early April, forcing employees to stay home.
Production in Japan has also begun to suffer. “The impact is far more severe than could have been imagined,” a Subaru executive said.
Disruption to parts procurement from China forced the automaker to shut down three Japanese plants, including its main plant in Gunma Prefecture, for two days from Thursday.
Non-manufacturers are also struggling. Fast Retailing has approximately 860 Uniqlo stores in mainland China. Recently, between 130 and 140 stores, including 86 in Shanghai City, have closed temporarily due to Covid-19.
Seven-Eleven also has about 140 of its 1,300 stores in mainland China, almost all of them are in Shanghai in addition to a handful in Beijing and airports. All were closed as of Thursday.
On Saturday, China’s National Bureau of Statistics released the Manufacturing Purchasing Manager’s Index and the Non-Manufacturing Business Activity Index for April.
The manufacturing sector was 2.1 points lower than the previous month at 47.4, while the non-manufacturing sector was 6.5 points lower at 41.9.
Both fell below 50 for the second consecutive month, indicating that the economy “contracted”. Both are the lowest since February 2020, when Covid-19 first started to be widespread.
In the non-manufacturing sector, almost all business conditions indexes for the service sector, including retail, food and beverage, lodging, and entertainment, fell below the milestone of 50.
Real estate has also been sluggish, and the market has remained cool due to tighter regulations aimed at curbing bubbles since last year.
Strict social regulations in response to Covid-19 are expanding. In Beijing, visitors must show negative proof of a PCR test within 48 hours when entering tourist attractions and hotels during the major holidays from Saturday to Wednesday.
In outlying areas, some cities enter lockdown after finding only one infected person.
The Xi Jinping leadership team, which has a political track record of suppressing Covid-19, is adamant about adhering to the zero-Covid policy, and local governments, fearful of punishment, do not hesitate to impose restrictions.
Higher resource prices due to the war in Ukraine are also putting pressure on earnings. Businesses are facing a triple whammy of declining demand, supply disruptions, and high costs, which is causing a shortage of funds and increasing uncertainty about the future.
An April survey by the Cheung Kong Graduate School of Business, which primarily targets smaller private companies, showed an increasing number of businesses expecting sales and profits to decline. Companies may become reluctant to hire new workers and invest.
Bank of America lowered China’s economic growth outlook for 2022 to 4.2% in light of the Covid restrictions. It estimates that if the situation worsens, such as wider lockdowns, growth will slow to 3.5%.
In contrast, China’s leadership remains bullish. The Communist Party leadership on Friday confirmed its policy of adhering to the 5.5% growth target. This is because stable economic growth is essential to Xi’s bid for an unprecedented third term at the fall party congress.
“The leadership is directing the economy to be propped up so that this year’s growth rate does not fall below that of the US,” said a member of the State Council, which is equivalent to China’s government.
The International Monetary Fund forecasts economic growth at 4.4% for China and 3.7% for the US this year.
If the Chinese economy deteriorates further and growth falls behind that of the US, it would be the first time since 1976.
This is a situation that Xi’s government, which is challenging the US for supremacy, wants to avoid. Beijing is scrambling to boost the economy by accelerating infrastructure investment and other measures.