The biggest risk to the world economy that no one is talking about

Nearly 400 million people in 45 cities across China are completely or partially closed as part of China’s strict nullacovid policy. According to Nomura Holdings, they together account for 40 percent, or $ 7.2 billion, of the world’s second largest economy’s annual GDP.

Analysts are sounding the alarm bells, but say investors are underestimating the severity of the global economic impact of these protracted foreclosure orders.

“Global markets may continue to underestimate the impact as much attention continues to be paid to Russia’s conflict with Ukraine and the US Federal Reserve’s rate hike,” Lu Ting, chief economist at China’s Nomura, and some colleagues wrote in a note last week.

The most alarming is the vague prison in Shanghai, with a population of 25 million and one of China’s major production and export centers.

Locks have led to food shortages, inability to get medical care and even pet deaths. They also caused staff shortages in the world’s largest port.

The port of Shanghai, which handled more than 20 percent of China’s freight traffic in 2021, is largely at a standstill. Food trapped in containers that do not have access to the refrigeration room is likely to rot.

Incoming cargo is now handled at Shanghai’s maritime terminals for an average of eight days before being transported elsewhere, an increase of 75% from the start of the recent wave of quarantine. The storage time for exports has been shortened, but this is due to shipments of new containers from warehouses, according to the Supply Chain Visibility Platform Project 44.

Freight airlines have canceled all flights to and from the city, and more than 90% of trucks supporting import and export deliveries are currently inactive.

According to the government’s 2021 statistical yearbook, Shanghai generates 6 percent of China’s exports, and plant closures inside and outside the city will further disrupt supply chains.

Sony and Apple supplies in and around Shanghai are not active. Quanta, the world’s largest laptop maker and MacBook maker, has shut down production altogether. The plant will produce about 20% of Quantan’s laptop production capacity, and the company estimates it will deliver 72 million units earlier this year. Tesla closed the Giga plant in Shanghai, which produced about 2,000 electric cars a day.

China’s Ministry of Industry and Information Technology said in a statement on Friday that it had sent a task force to Shanghai to work on a plan to resume production at 666 major manufacturers in an isolated city. Tesla executives hope to reopen by Monday, ending the plant’s longest break since it opened in 2019. According to Reuters estimates, the carmaker has lost more than 50,000 production units to date.

“The impact on China is important and the impact on the global economy quite significant,” said Michael Hirson, Eurasia Group in charge of China and Northeast Asia. “I think we will have more instability and economic and social turmoil for at least the next six months.”

Prolonged disruptions in Chinese production and supply could help accelerate a key initiative by the Biden administration to reduce U.S. dependence on Chinese products and supply chains.

However, the task has serious immediate financial consequences.

In a report released last week, the World Trade Organization warned of a worst-case scenario involving the decoupling of world economies fueled by Russia’s invasion of Ukraine, which could cut long-term global GDP by 5 percent.

This is highly unlikely given the deep economic ties between China and the United States. According to Rhodium Group, investments in equities and bonds totaled $ 3.3 billion at the end of 2020.

“These economies are still very intertwined,” Hirson said. “This integration cannot be easily reversed because it would be incredibly costly for the United States and the world economy.”

Yet U.S. CFOs believe the decoupling is already underway.. Howard Marks, one of the founders of Oaktree, wrote in late March that “the pendulum [tem] back to local acquisition “and out of globalization. Blackrock chairman Larry Fink reiterated this feeling in a letter to the company’s shareholders.” Russia’s invasion of Ukraine has put an end to the globalization we have been experiencing for more than a year. the last three decades.

Minister of Finance Janet Yellen told the Atlantic Council last week that the United States is closely monitoring China’s political and economic ties with Russia. “In the future, it will be increasingly difficult to separate economic issues from broader national interests, including national security,” he said.

Although he said he hoped to avoid a “bipolar gap” between China and the United States, “the world’s attitude towards China and its willingness to adopt greater economic integration may well be influenced by China’s reaction to our demands for decisive action against Russia.”

One third of China, meanwhile, is in quarantine and its economy is suffering.

China’s recent pandemic response is expected to cost at least $ 46 billion in lost economic output per month, or 3.1 percent of GDP, according to a study by the Chinese University of Hong Kong.

Analysts no longer believe that China’s 2022 economic growth target for 2022, the country’s least ambitious target in three decades, is realistic. The World Bank raised its estimate of China’s economic growth to 5 percent this week, but noted that if its restrictive policies continue, they could fall to 4 percent.

The financial burden comes at a time of political uncertainty. This fall, Chinese President Xi Jinping will apply for a third term as the country’s leader, breaking the maximum tradition of two seasons.

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