Back at forefront: China's harsh COVID-19 response frightens investors

The New York Times
Back at forefront: China's harsh COVID-19 response frightens investors

A surge in Omicron variant infections has prompted Chinese authorities to lock down residents, close factories and stop truck traffic, snarling already frayed supply chains, The New York Times writes. Trucks are being delayed by the testing of drivers. Container rates are rising as ships wait for many hours at ports. Products are piling up in warehouses.

As Chinese officials scramble to contain the country’s worst outbreak of Covid-19 since early 2020, they are imposing lockdowns and restrictions that are adding chaos to global supply chains. The measures in China, home to about one-third of global manufacturing, are disrupting the production of finished goods like Toyota and Volkswagen cars and Apple’s iPhones, as well as components such as circuit boards and computer cables.

Cases rose on Tuesday to more than 5,000 new infections nationwide. That tally is small compared to many other large countries’. But China has taken a zero tolerance approach to outbreaks that calls for stringent lockdowns as well as mass testing and quarantine in government facilities. Because several of the country’s largest industrial cities are now fighting outbreaks, such measures are taking a toll on the factory and transportation networks that are the backbone of China’s manufacturing — and the global economy.

After surging last week, oil prices slid about 5 percent at the start of trading on Monday, in part on fears of an economic slowdown in China. And the global economic harm already caused by China’s rise in cases — and the government’s tough response — could get worse.

Officials in Beijing and an ever-lengthening list of cities and provinces say that the virus is still spreading and that the government must take ever tougher measures to stop it. “Recently, local clustered epidemics have occurred in many places in our country, mainly of the Omicron variant, which has spread quickly and is very hidden,” Mi Feng, a spokesman for the National Health and Health Commission, said on Tuesday. “The epidemic prevention and control is more difficult, and the situation is severe and complicated.”

In Jilin Province in China’s northeast, which has the biggest concentration of recent cases as well as many factories making cars and car parts, Zhang Li, a deputy director of the provincial health agency, said that residents and officials would have to “urgently mobilize and act to overcome difficulties with clenched teeth — we are racing against time.”

To some foreign investors, the outbreak itself may be less unnerving than the unpredictability of government measures. “The business risk in China now is higher than at any time since late spring 2020,” said Julian MacCormac, chairman of the British Chamber of Commerce in China.

Lockdowns have also suspended work at electronics factories in the south and a wide range of industrial companies in central China. Cities near Shanghai have closed highway exits or demanded that each driver show a negative P.C.R. test — requirements that have also created miles-long lines of trucks trying to carry crucial components among factories.

High international freight costs, a serious problem last year that has contributed to inflation in the United States, have begun climbing again after a dip during the Chinese New Year holiday last month.

The cost to ship a container of goods from Asia to the U.S. West Coast inched up to $16,353 as of last Friday, before the latest coronavirus restrictions took effect, compared to $16,155 a week earlier. Rates have almost tripled from a year ago and have risen 12-fold from two years ago, according to data from Freightos, a freight booking platform.

Ports in China now require workers to live and work at the docks for as long as two months at a time, away from their families, so as to prevent infections. That has allowed the ports to keep operating even during sustained outbreaks, in contrast with severe shipping delays last spring and summer when infections forced extended closings of big container terminals in Shenzhen and near Shanghai.

But with truck traffic to the docks interrupted, ships are facing delays at the ports of at least 12 hours, and may soon have to wait for as long as two weeks, said Julie Gerdeman, chief executive of Everstream Analytics, a supply chain analysis firm. “Even the most prepared businesses will be impacted by these new lockdowns in China, as flexibility within the supply chain is minimal,” she said.

Airfreight is also facing fresh complications. The Civil Aviation Administration of China said Tuesday that many of the remaining international flights into Shanghai’s vast Pudong airport would be rerouted to other Chinese cities from next Monday until May 1. The measure would free quarantine rooms in Shanghai for the city’s residents and close contacts, but further delay exports.

At least five large factory cities have completely shut down because of the coronavirus: Dongguan and Shenzhen in southern China near Hong Kong, where Foxconn has huge factories to make iPhones and other Apple products; Changchun and Jilin City in northeastern China’s Jilin Province; and Langfang, next to Beijing. Some smaller cities have also gone into lockdowns, like Suifenhe and Manzhouli on China’s border with Russia.

In Dongguan, an industrial city of 7.5 million people, some factory owners said that they were still being allowed to operate as long as their workers lived in dormitories inside factory compounds, and no one was allowed to leave or enter.

Deng Shiwen, the owner of a small factory that makes packaging materials in Dongguan, said that his several dozen employees were still living and working inside the compound but he could not ship anything to customers. “I just leave the newly made stuff here for now,” he said.

Other cities, notably Shanghai, have not declared citywide lockdowns but have closed so many neighborhoods, shopping malls and industrial parks at least temporarily that companies are encouraging employees to work from home as much as possible.

Hour by hour through Monday and Tuesday, the list of companies announcing production halts because of lockdowns has grown. Toyota and Volkswagen stopped their assembly plants and other factories in Changchun. A printed circuit board maker, Unimicron Technology, in Shenzhen. Global Lighting Technologies, a light-emitting diode, or LED, maker, in Shanghai.

Some companies, like Foxconn, said they would try to shift production to other plants. But Mary E. Lovely, a senior fellow at the Peterson Institute for International Economics, said it seemed “hard to believe” that Foxconn would have slack at their other facilities that could accommodate the company’s vast operations near Hong Kong.

In the end, Foxconn and other companies would likely prioritize certain major customers, like Apple. “So you’re going to see the same thing you saw before, which is that smaller companies that depend on these imported parts and equipment from China are going to be hit,” Ms. Lovely said. “You know that China is going to do everything it can to get this under control. The question is what’s stronger, the Chinese government or the virus,” she said, adding, “We know that Omicron is quite a formidable opponent.”