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China lockdowns could trigger a major supply chain disruption: Expert

China lockdowns could trigger a major supply chain disruption: Expert

A traffic police officer prepares to check a truck at the G1503 Shanghai Ring Expressway service station on April 11, 2022 in Shanghai, China. The main Chinese city has been among the worst affected as China battles the most severe outbreak of the Covid virus since the early days of the epidemic in 2020.

Yin Liqin | China News Service via Getty Images

Many goods are stuck in China right now as a result of the Covid lockdown and could become a “big problem” for the global economy, according to business consultant Richard Martin.

“Many of the things we use around the world that are manufactured, have components from China, and we are on the cusp of seeing a logistics crisis that will dwarf anything in 2020 or 2021,” said Martin, managing director at IMA Asia. Asia” on CNBC on Tuesday.

“China accounts for 20% of global demand but its role in supply chains is much larger than that.”

Since the pandemic’s early months, the global economy has been plagued by supply chain challenges due to a combination of factors – such as logistics struggling to keep up with trade volumes, or Covid increases in parts of Asia that threatened to disrupt the flow of goods.

The war in Ukraine, which broke out in late February after Russia invaded the country, added to these fears.

“The outlook for the global economy is now very bleak – Europe has a war on its doorstep, the US has had big rate hikes that could affect the American consumer and in China, it is really slowing down,” Martin said.

The impact of lockdowns on the Chinese economy

In the past few weeks, China has been battling the most serious outbreak of the COVID-19 virus on the mainland since the initial shock of the epidemic in early 2020.

“China is very weak right now,” said Rob Subaraman, chief economist and former head of global markets research for Asia and Japan at Nomura.

Referring to Nomura’s survey on the extent of lockdowns across China, he said, “If we look at the provinces where there is a partial or complete lockdown, we estimate that it covers about 40% … of China’s GDP.”

China looks very weak at the moment and really needs more political stimulus.

Rob Subbaraman

Chief Economist, Nomura

Shanghai is among the worst-hit places, with local authorities taking strict stay-at-home measures and travel restrictions. The northern province of Jilin, home to many auto factories, was also hit hard, although infections appeared to be starting to recover.

“The problem Beijing has is all over the country – not just Shanghai but in the south in Guangzhou and of course in Jilin where there has been a lot of industrialization,” Martin said.

He added that local officials are “locking down entire cities” for fear of punishing Beijing if there is an outbreak of Covid in their jurisdictions.

Subparaman said supply disruptions are occurring at an increasingly rapid rate at the moment. “We think that retail sales in China will probably go down in March, China looks very weak at the moment and really needs more stimulus policies,” he added.

Read more about China from CNBC Pro

Since the beginning of the epidemic, China has adopted a strict strategy to eliminate the Corona virus, where strict restrictions are placed after infections are discovered. In contrast, most of its global peers have largely shifted towards living with Covid and have begun to reopen their borders to international travel.

“You can’t see President Xi Jinping back off [China’s] The zero-Covid policy has almost become a hallmark of the administration.”

He cautioned that while China is expected to eventually avoid the current wave of Covid infections that has stemmed from a highly transmissible omicron variant, this will likely come at the cost of an economic slowdown.

CNBC’s Evelyn Cheng contributed to this report.

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