The harsh reality of a zero-tolerance Covid policy


As of May 10 2022, almost 400m people in China are in lockdowns that have been fluctuating in strength for the past 6 weeks. This population figure is 3/4 of the population of the EU and more than the entire population of the USA. The response of the Chinese state to its worst Covid outbreak since the start of the pandemic is the continued installation of a zero-tolerance policy towards Covid. Bloomberg reports that May 9 saw 3,426 new infections, a significant decrease from the 27,000 new daily cases the country was seeing in mid-April. The lockdowns were originally easing, however due to a resurgence in infections, restrictions were tightened. Shanghai now has 25m residents barred from leaving their homes. These fresh restrictions raise concerning questions regarding the impact on a global supply chain which has chosen to live with and adapt to Covid.

China, the leading economic and manufacturing powerhouse of the world, will most likely see its productivity and output remain low. Disruption to the supply chain will return, with FourKites data suggesting the volume of goods moved from the Port of Shanghai fell by 23% in the month before March 12. Ti data suggests Shanghai was the busiest seaport in 2021, processing the highest number of TEUs for any port around the world. Naturally, the number of cases in the country and region will lead to a reduced capacity for production in the port, as well as capacity on the limited number of shipments.

This zero-tolerance response is to be expected from the Chinese state. The major lockdowns implemented at the beginning of the pandemic saw a severe economic downturn, however the Chinese economy did turn itself around, recovering with a growth rate of 8.1% in 2021. It has also managed to generate 12.7m new jobs since the start of 2020. It was also seen as a safer location for money, with foreign investment increasing by 15% from 2020-2021. Limiting lasting economic damage is the aim of its strict lockdowns, and with no port closures, the country stands in better stead to achieve that.

The damage of port congestion in Shanghai is however already rearing its ugly head. Project44 has said that the 2-week period from 7-21 of April saw import containers wait an average of 12.1 days, up 163% from the 2 week period before, where average container wait times were 4.6 days. Given the reduced volume at Shanghai, shipments are moving to river based ports such as Ningbo-Zhoushan. The backlog of reduced shipments has led to a 10% surge in rates between Europe and South America, according to Freightos, with 30% of backlogged shipments coming from China. The high rates and bottlenecks are proving to be a risk to the economy and the foreign investment that the country worked so hard to cultivate in the past year. A Financial Times survey reports that the Chinese services sector is at its lowest levels of activity in over 2 years, highlighting the precarious state the economy is in. The survey saw almost a quarter of 372 European companies state they were considering moving out of China, with 78% stating the country is less attractive for investment due to its Covid policies. It is severely at risk of putting all investors off and further hampering not only its own economic performance but that of the rest of the world.

China and its productivity decisions have huge ramifications on the global economy. Backlogs due to closures will lead to more backlogs in the future. Global sea freight is at risk from the full re-opening of Chinese ports as a plethora of cargo is likely to be released, overwhelming ports across the world and the San Pedro Complex in particular. The same happened with port bottlenecks in H2 of 2021, driving wait times and freight rates up. Furthermore, the loss to the Chinese economy and GDP is likely to be counterbalanced by another hike in inflation. The cost of living within the country is high due to the impact on commodities that the war in Ukraine is having, as well as the global-high cost of fuel, but importantly, the cost of the limited manufacturing that is occurring is high. It is like that global inflation will continue to steadily grow as China continues to struggle. Elsewhere, the logistics industry must prepare for more port backlogs and bottlenecks, as well as ocean freight rates continue to creep up as we head towards the second half of the year.

Source: Transport Intelligence, May 12, 2022

Author: Alex Bullard

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