With two-fifths of the economy and a population greater than that of the United States in some form of lockdown, China is struggling to respond to a Covid-19 outbreak that continues to spread. We're starting to see early signs of how much its harsh attempts to eliminate the virus are hurting and hampering the world's second-largest economy.
In all, 45 Chinese cities that are home to 373 million people have instigated a full or partial lockdown, according to an in-house Nomura survey. Collectively they account for 26.4% of the Chinese population, and C¥46 trillion (US$7.2 trillion) in output, or 40.3% of GDP.
Nomura notes that's a "big rise" from the figures of a week ago, double the impact in fact, "but these figures may significantly underestimate the full impact of the ratcheted-up ZCS [zero-Covid strategy], as many other cities have been carrying out mass testing district by district, and mobility has been significantly restricted in most parts of China."
There's also mounting fury about the length of the lockdown in Shanghai, China's largest city. Many of its 26 million residents report being unable to find food, with the wife of a Hong Kong celebrity posting her meager load of fresh produce on social media, noting that she paid C¥1,500 plus a C¥500 delivery fee (a total of US$315).
Some residents have posted protest footage of crowds confronting the "Big White" figures in biohazard suits, officials who at times barricade residents in their flats. Others show drones equipped with facial recognition flying overhead stating, "Please comply with Covid restrictions. Control your soul's desire for freedom. Do not open the window or sing."
Sadly, pets are also paying a heavy price. Officials have been rounding up and culling dogs and cats, including the "fur friends" of people who have been taken into quarantine.
Chinese equities are descending accordingly. The CSI 300 index of the largest listings in Shanghai and Shenzhen closed down 1.0% on Wednesday, and has now lost 15.8% year to date. That's double the global average loss, ex-U.S., and by far the worst performance in Asia, where even the beleaguered Hang Seng Index in Hong Kong is down "only" 8.2% in 2022.
Other markets in East Asia moved higher on Wednesday, with the Topix in Japan up 1.4%. The tech-driven markets in South Korea, where the Kospi advanced 1.9%, and Taiwan, where the Taiex gained 1.8%, also advanced.
Several suppliers to companies such as Apple (AAPL) are having to curtail operations.
The iPhone producer Pegatron TW:4938 says it has halted operations at factories in Shanghai and next-door Kunshan, a key electronics hub.
MacBook manufacturer Quanta Computer (QUCCF) and TW:2382, which like Pegatron is based in Taiwan, says it has also suspended operations in Shanghai.
Foxconn Technology (HNHPF) and TW:2354, Apple's largest supplier, saw its operations shut down in March in the southern tech hub of Shenzhen. It resumed "fundamental operations" late last month. But Foxconn has also been shifting some iPhone production to India. Apple said this week it will be making the iPhone 13 at Foxconn's subsidiary near Chennai.
Investors are looking to indications from retailers with extensive operations in China to see how much of a hit they're going to take. Japanese high-street fashion label Uniqlo and its parent Fast Retailing (FRCOF) and T:9983 will report earnings on Thursday, and the market suggests it won't be pretty.
Fast Retailing shares bucked the Tokyo trend today to fall 2.7%, and are now down 9.5% over the last five trading days. China is the top foreign market for Uniqlo, which has 89 stores in Shanghai alone, including its global flagship on Nanjing Road, and 863 outlets China-wide.
China is also Uniqlo's largest production base, by far. Fast Retailing uses a network of 239 garment factories in China, and 49 fabric mills, 10 times the number of production partners it has in its home nation. So we can expect an even greater hit to earnings next quarter when the current logistical logjam in China feeds through.
A rising number of Chinese cities require truck drivers to take daily PCR tests before they're allowed to cross municipal borders, or force at-risk drivers into quarantine. That coupled with infections among drivers themselves is robbing the Chinese logistics industry of key members of its labor force. Supply-chain managers report that cities like Shanghai and Kunshan face a severe driver shortage.
The trucks aren't getting through. The Road Freight Index for China plummeted 26.5% in the first 10 days of April, compared with the same time in 2021, far steeper than the 2.6% decline in March. Coastal areas crashed, with road freight falling off a cliff in Shanghai, down 80.8%. Declines of 40% are quite typical for the key port provinces.
Those kinds of issues are percolating through, with numbers released Wednesday showing that imports into China unexpectedly fell 0.1% year-on-year for March. While exports grew 14.7%, that was a moderation from the 16.3% pace in January-February. The numbers are likely to look a lot worse when the figures for April filter out.
Nomura expects 0.0% export growth for April, compared with last year, with imports falling further to a 0.3% decline.
There was a moment of optimism stemming from Tuesday's Covid-19 figures from the Chinese Center for Disease Control and Prevention, which showed a drop from the previous day. That was the first time in more than a week that the daily tally failed to set a new record high.
But Wednesday's numbers are back to form, with infections rising to 28,038, a new high-water mark. As recently as early March, Covid cases were numbering just over 300 per day.
Although China is still attempting to eradicate Covid-19, it is making concessions to what it calls a "dynamic" zero-Covid strategy. That has incorporated neighborhood lockdowns in some instances, instead of citywide shutdowns.
Eight cities including Shanghai and Guangzhou are now launching pilot programs to test out looser quarantine requirements for people in lockdown, travelers returning to China from abroad, and the close contacts of confirmed Covid cases, according to the business publication Caixin. The cities, which also include Chengdu, Dalian, Ningbo, Qingdao, Suzhou and Xiamen, will try reducing quarantine from the current 14 to 10 days but with a high frequency of nucleic-acid and antigen tests.