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

How is confinement lived in Shanghai?

This is how a CNN reporter relates it 3:10

New York (CNN Business) --

Nearly 400 million people in 45 Chinese cities are under full or partial lockdown as part of China's strict "zero Covid" policy.

Together, they account for 40%, or $7.2 trillion, of the annual Gross Domestic Product of the world's second-largest economy, according to data from Nomura Holdings.

Analysts are sounding alarm bells, but say investors are not properly assessing the severity of the global economic fallout that could stem from these prolonged lockdown orders.

“Global markets may continue to underestimate the impact as much attention remains on the Russia-Ukraine conflict and US Federal Reserve rate hikes,” wrote Lu Ting, chief China economist. de Nomura, and his colleagues in a note last week.

Most alarming is the indefinite lockdown of Shanghai, a city of 25 million people and one of China's main manufacturing and export hubs.

Quarantines have led to food shortages, inability to access medical care, and even pet deaths have been reported.

They have also left the world's largest port without staff.

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• Three reasons why the Shanghai lockdown matters for the global economy

The port of Shanghai, which handled more than 20% of Chinese freight traffic in 2021, is practically at a standstill.

Food supplies trapped in shipping containers without access to refrigeration are rotting.

Incoming cargo is now stuck at Shanghai sea terminals for an average of eight days before being transported elsewhere, a 75% increase since the recent round of lockdowns began.

Export storage time decreased, but this is likely due to no new containers being shipped to docks from warehouses, according to supply chain visibility platform project44.

Cargo airlines canceled all flights in and out of the city, and more than 90% of the trucks that support import and export deliveries are currently out of service.

Shanghai produces 6% of China's exports, according to the government's statistical yearbook for 2021, and factory closures in and around the city are further shaking supply chains.

Supplier plants for Sony and Apple in and around Shanghai are on hold.

Quanta, the world's largest contract laptop maker and maker of the MacBook, has halted production altogether.

The plant accounts for about 20% of Quanta's notebook production capacity, and the company previously estimated it would ship 72 million units this year.

Tesla closed its Giga Shanghai factory, which produced about 2,000 electric cars a day.

• ANALYSIS |

  The chaotic confinement in Shanghai by covid-19 leaves other cities in China in suspense

On Friday, China's Ministry of Industry and Information Technology said in a statement that it has sent a task force to Shanghai to work on a plan to resume production at 666 key manufacturers in the confined city.

Tesla executives expect to be allowed to reopen by Monday, ending the factory's longest hiatus since it opened in 2019. The automaker has lost more than 50,000 production units so far, according to revised materials. by Reuters.

"The impact on China is significant and the knock-on effects on the global economy are quite significant," said Michael Hirson, Eurasia Group's practice head for China and Northeast Asia.

"I think we are in for more volatility and economic and social disruption for at least the next six months."

Prolonged disruptions to Chinese manufacturing and shipping could help accelerate a key Joe Biden administration initiative aimed at reducing America's reliance on Chinese goods and supply chains.

But the task carries serious immediate economic repercussions.

Covid-19 restrictions affect Chinese economy 1:05

In a report published last week, the World Trade Organization warned that, in a worst-case scenario, the decoupling of world economies, spurred on by the Russian invasion of Ukraine, could reduce long-term world GDP by 5 %.

This is highly unlikely given the deep financial connections between China and the United States.

Investment in stocks and bonds each reached $3.3 trillion at the end of 2020, according to data from the Rhodium Group.

"They are still very intertwined economies," Hirson said.

"That integration is not something that is going to be easily reversed because it would be incredibly costly for the US and for the global economy."

Still, US economic leaders believe decoupling is already underway.

Oaktree co-founder Howard Marks wrote in late March that "the pendulum (has) swung back toward sourcing local" and away from globalization.

Blackrock chairman Larry Fink echoed this view in a letter to company shareholders.

"The Russian invasion of Ukraine," he wrote, "has put an end to the globalization that we have experienced in the last three decades."

In a speech to the Atlantic Council last week, Treasury Secretary Janet Yellen said the United States is closely watching China's political and economic connections with Russia.

"In the future, it will be increasingly difficult to separate economic issues from broader considerations of national interest, including national security," she said.

While he said he hopes a "bipolar split" between China and the United States can be averted, "the world's attitude toward China and its willingness to embrace further economic integration may be affected by China's reaction to our call for decisive action on Russia".

Meanwhile, a third of China is in quarantine and its economy is suffering.

Panic buying in Shanghai due to covid-19 confinement 1:00

China's recent response to the pandemic may cost at least $46 billion of lost economic output per month, or 3.1% of GDP, according to research from the Chinese University of Hong Kong.

Analysts no longer believe the 5.5% economic growth target for 2022, the country's least ambitious in three decades, is realistic.

The World Bank this week revised its estimates for Chinese economic growth to 5%, but said that if its restrictive policies continue, it could fall to 4%.

The economic burdens come at a politically precarious moment.

This fall, Chinese President Xi Jinping will ask for a third term as the nation's leader, breaking with the tradition of a maximum of two terms.

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