Frustration in Shanghai mounts as a two-stage lockdown takes effect following a surge in COVID cases. Authorities had adopted a targeted approach to dealing with the outbreak, however, as case numbers continued to rise, it became clear a new strategy was necessary. Residents in Shanghai, China’s most populous city as well as its financial capital, have taken to social media to vent their frustrations with the lockdown. Citizens who have self-tested positive complain about waiting days to be transported to a central facility. More complaints were voiced about medical care access, purchasing food and other daily tasks that are difficult at best under lockdown conditions.
Although the number of new cases in Shanghai is small by global standards, reaching upwards of 15,000 in three days, China persists with an aggressive strategy. Its ‘dynamic clearance’ approach calls for all residents testing positive for COVID-19 to be sent to hospitals or a central quarantine facility. Close contacts and neighbors are ordered to quarantine at home and self-test. The city has essentially been divided into two, with the Huangpu River acting as the boundary line. Neighborhoods east of the river were placed in lockdown on Monday, with the western areas expected to enter restrictions by Friday.
Rumors that authorities would begin the lockdown in the western neighborhoods earlier than Friday sparked panic buying and chaos. Officials have attempted to quash the rumors yet persistent reports from neighborhoods in the west paint a different picture. Many residents there received notice on Tuesday from their housing committees that they would be stopped from leaving their compounds for the next seven days, according to a report from Reuters.
Shanghai’s lockdown will carry a global effect as well. Manufacturing will plateau at least temporarily as factories close for a period. This will only add to the litany of problems facing global supply chains. Oil prices fell earlier this week too as the COVID lockdown created fears about declining demand for oil from China. The retreat will only be temporary though as the global oil market struggles to replace Russian supply.
The debt crisis now threatening to overwhelm property developer Evergrande arrives at a decidedly inauspicious time for China. With the national economy continuing to slow, the prospect of an economic crisis centered on a Chinese entity is quite real. Global markets sense it and investors are preparing for the ripple effects. Last week, Fitch Ratings agency downgraded its forecast for China’s economic growth, citing the slowdown in the property sector as the prime contributing factor. Evergrande has been in trouble for some time now and its current problems did not arrive out of nowhere. In fact, alarm bells have been sounding for years over the state of the Chinese property market.
All eyes are focusing on Xi Jinping now as it becomes clear the Chinese government will likely have to intervene. To put it simply, Beijing cannot stand on the sidelines and permit a chaotic default where citizens lose large sums of money. Allowing that could cause a ripple effect in other sectors of the national economy, another prospect Beijing cannot allow. As a hedge against a worst-case scenario coming about, the Chinese government has ordered local officials to prepare for a potential Evergrande collapse. Local governments and Chinese-owned enterprises are being directed to intercede only if Evergrande is unable to meet its obligations. Some Chinese officials have described the measures as storm preparation.
How Beijing handles the crisis in coming days will set the tone for market behavior. If investors are encouraged by the way the Chinese government handles the Evergrande situation it will minimize the damage and perhaps instill a burst of positivity to China’s national image, which has absorbed considerable damage over the past 18 months.
Global markets took one on the chin today, both literally and figuratively. A combination of coronavirus panic, and the unexpected oil price deadlock between Russia and Saudi Arabia sent investors reeling, and caused European, Asian, and North American stock indexes to crater. The Dow fell 2014 points, marking its worst day since 2008 as investors fled for safe havens such as precious metals, and US treasuries. Other markets around the world fared no better. European markets tumbled an average of 7 percent, and in Asia the Nikkei dropped more than 5 percent and the Hang Seng Index lost 4.2 percent.
All things considered, some degree of volatility was expected to dominate Monday’s sessions given the coronavirus situation. However, it was the situation in the oil markets that brought on the rout. The oil production standoff between Saudi Arabia and Russia over the weekend took the world by storm and sent oil prices spiraling to some of their lowest levels since the 1991 Persian Gulf War. As it stands right now, Russia and Saudi Arabia’s actions could lead to an oil price war, something that could bring on unforeseen circumstances for oil and stock markets down the line.
The markets could’ve handled one or the other today, either the volatility brought on by coronavirus fears, or the oil collapse. Taking on both and coming out unscathed, however, was not in the cards. It remains to be seen how today’s events will affect global economies. Another day like today would put Wall Street on the verge of a bear market, and could quite possibly cause the juggernaut that is the US economy to begin to lose steam.
The coronavirus outbreak has cast a light on the indispensable role China plays in global supply chains. China is the manufacturing base for a large percentage of global businesses and the virus has kept many factories and plants shuttered since the end of the Lunar New Year holiday. As the virus continued to affect every facet of life in China, with large swaths of territory under quarantine restrictions, multinational companies are waking up to the realization they could be facing a potential long-term disruption in the supply chain. The electronics industry is being particularly hard hit by disruptions to its supply chain. With assembly plants that make the iPhone in China still closed Apple will likely ship 5-10% fewer iPhones this quarter according to analysts.
With the economic blowback of the coronavirus continuing to expand, many companies are coming to the realization of how vulnerable their current supply chains are to disruption. The single geography sourcing strategy is suddenly not so appealing. As a result, alternatives are being examined carefully. The race is on to design sustainable supply chains that can overcome the disruption challenges of the present-day and the future. Regional sourcing will become more prevalent, meaning an economic boost for developing regions in places like Africa, and South America. Unfortunately, their good fortune will come at China’s expense and this is something that Beijing will not take lightly to.
Author’s Note: Short posting today, I apologize. Chemo effects kind of knocked me out, but I’ll bounce back with more detailed posts tomorrow and this weekend.
Vice Premier Liu He,China’s senior negotiator for trade has publicly announced that China is willing to resolve the trade dispute with the United States through negotiation. Liu also stated that his country opposes an escalation of the trade war now underway. The composed gesture coming from Beijing was answered by President Trump at the G-7 summit underway in France. Trump went as far as to predict that a trade deal will be reached with China at some point in the near future. It remains unclear whether today’s gestures reflect sincere intentions or if they are simply water on the fire. Last week’s wave of new US and Chinese tariffs sent global markets into spasms. Monday’s conciliatory words helped to calm markets, however, the current trade situation between the United States and China remains volatile.
Trade talks are expected to resume in Shanghai next month. Expectations will be high even though both Washington and Beijing will likely remain cautiously optimistic about the chance that further talks will bring an end to the trade war. Suffice to say, it would be in Beijing’s best interests to bring the trade matters to an end soon given what’s happening in Hong Kong, as well as recent issues in the South China Sea. China cannot move decisively in either area while the eyes of the world remain fixed on it. Beijing understands this, yet there are factions in the government that favor taking a harder line in the next round of trade discussions.