Why is the Chinese economy falling?
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(CNN Business) --
Global shipping was beginning to recover from the chaos and delays caused by the pandemic, but now port congestion and delays are back due to lockdowns in China and could last for a while.
China's Covid-19 lockdowns have wreaked havoc in Shanghai, the world's largest container port, and are now wreaking havoc in other major ports around the world.
China's economy is in decline
Some Chinese cities, including Shanghai, have started to ease Covid-19 restrictions in recent days, but experts say the damage has already been done, and global shipping will suffer well into the summer.
This could put even more pressure on global supply chains already reeling from the Russian invasion of Ukraine, and keep inflation red hot.
Transport delays have their origin in China
Data from Project44, which tracks global supply chains, showed that shipping delays between China and major US and European ports have quadrupled since late March, when China shut down the city of Shanghai, which has the busiest container port in the world.
At the end of April, ships from China bound for Seattle were taking four days longer than expected to arrive, up from one day the previous month.
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A Cosco Shipping container ship is seen at the Yangshan deepwater port amid the novel coronavirus disease (COVID-19) outbreak in Shanghai, China, 24 April 2022.
The time it takes for ships to leave China and reach the world's major ports has risen steadily over the past year, but there have been some signs of relief since December, as transit times between Shanghai and Long Beach, by example, they fell in January and February.
Since March, however, there has been a sharp increase in transit times on that route.
Compounding the problem, many truckers have had difficulty getting to Chinese ports to pick up containers due to travel restrictions and COVID-19 testing requirements.
Shipping giant Maersk warned in a statement last month that trucking services in Shanghai would be "severely" affected by these restrictions.
“With the manufacturing industry shutting down [in Shanghai] and truckers unable to travel quickly, exports are down and shipping delays are up,” said Josh Brazil, director of Supply Chain Data Insights at Project44. .
The delays "will continue into the summer months" as factories struggle to return to normal in Shanghai, it added.
Although the authorities have allowed some companies to resume production, many workers remain stuck in quarantine at home.
Factories that are reopening face component shortages and difficulty getting trucks to transport goods to or from the port.
"Shipment delay waves are only beginning to become visible and are expected to continue for the next several months," Brazil said.
Trucks wait to load containers at the Yangshan deepwater port on April 27, 2022 in Shanghai, China.
Shanghai, the main financial center and the most populous city in China, has been under a strict lockdown since the end of March.
More than 8 million residents are still prohibited from leaving their residential complexes.
Covid-19 restrictions have spread to other cities, including Beijing, the country's capital.
Shanghai port has remained open during the lockdown, but data from several shipping companies shows a growing backlog of ships and containers.
US supply chain companies have raised concerns about new chaos looming at US ports, which are still reeling from severe congestion and delays last year.
Shelley Simpson, chief commercial officer of JB Hunt Transport Services, stated late last month that while there has been "temporary relief" at US ports, things may get "much worse" this summer due to what is happening in China. .
"It only takes a little disruption for the environment to change back," he added.
Ships and containers clog ports in China
Queues for shipping are getting worse in China, and in other parts of the world.
Nearly 20% of the world's container ships are waiting outside congested ports, according to a survey released Thursday by Windward, an Israel-based global maritime data company.
Cranes lift containers at the Yangshan deepwater port on April 27, 2022, in Shanghai, China.
Nearly a quarter of those undocked ships are stuck outside Chinese ports.
There are 412 ships, 58% more than in February, adds the survey.
It is clear that the lockdowns in China have caused a bottleneck, the firm said.
Across China, at least 27 cities are under full or partial lockdowns, which could be affecting as many as 185 million residents across the country, according to CNN's latest estimate on Wednesday.
Beijing effectively closed its largest district this week.
President Xi Jinping signaled this week that China would continue its zero-tolerance approach to COVID-19.
On Thursday, Xi urged all levels of the government to "resolutely adhere to the zero COVID-19 policy."
China is home to seven of the world's top 10 container ports, including Shanghai, Ningbo-Zhoushan, Shenzhen and Hong Kong.
In Shanghai, the epicenter of the current COVID-19 outbreak in China, the situation remains dire.
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The number of ships waiting in the port of Shanghai had risen to 384 on April 25, up 27% from a month earlier, according to the latest data from S&P Global Market Intelligence.
Pressure is mounting at other Chinese ports as well, as ships try to find alternative ports to dock.
Since the end of March, ships have been facing mounting delays outside the port of Ningbo-Zhoushan, the world's third-largest port less than 100 miles from Shanghai, according to Lloyd's List Intelligence.
Containers are also piling up due to truck shortages.
At the height of the Shanghai lockdown, containers spent up to 15 days at the port before being picked up by truckers, compared with less than 5 days for the restrictions to take effect, according to data from Project44.
The average wait time has since dropped, but as of last Wednesday it was still 10 days.
Zhang Wei, deputy mayor of Shanghai, acknowledged last week that the city is experiencing "lower efficiency" in freight transport and "poor logistics" since the start of the lockdown.
Industry and commerce suffer from delays
The turmoil at ports has already affected China's factories and foreign trade, as manufacturers have to wait longer for raw materials.
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They also find it more difficult to ship their products to customers.
Finished goods inventories have reached the highest level in a decade, as products pile up in warehouses due to low demand and the difficulty of finding trucks to move them.
The latest PMI surveys - released on Saturday - showed factory activity slumping to the worst level since February 2020, when China was battling the initial outbreak of Covid-19.
New export orders received by manufacturers in April fell at a much faster rate than in March.
The decline in export orders showed that chaos in some major ports, including Shanghai, has affected China's trade with the rest of the world, according to Goldman Sachs analysts.
Worryingly, there was plenty of evidence of worsening supply pressures, with supplier lead times collapsing, input prices rising and finished goods inventories rising to their highest level since June 2012," Mitul Kotecha, head of Emerging Markets Strategy at TD Securities, wrote in a report.
"These supply pressures will have ramifications throughout supply chains globally, as some recent first-quarter earnings reports in the US tech sector have already highlighted," he added.
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Global inflation will rise due to transport delays
The situation in Shanghai will cause global inflation to rise this year, according to Daejin Lee, associate director of S&P Global Market Intelligence.
He noted that last year's inflation was driven by two factors: shortages of key parts due to bottlenecks in the supply chain, and high container freight rates, which reached record levels.
Both problems continue this year, even as Russia's invasion of Ukraine has fueled global inflation by pushing up prices for energy and other key commodities.
"Another long delay" in seaborne supply of key parts due to China's port congestion could push up consumer prices "much faster than expected," Lee said.
Maersk said on Wednesday freight rates will remain high as supply chain pressures persist.
According to the company, congestion in sectors such as trucking and warehousing in mainland China have created "bottlenecks, leading to challenging supply chain management services and high fees."
The company's average freight rate soared 71% in the first quarter from a year earlier.
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