Shanghai a Bigger Threat to the Economy Than Investors Realize

Alarm bells are ringing for some analysts over the Shanghai lockdown. They say that investors don’t realize how much of a threat these lockdowns in China are to the United States economy and the global economy at large. In China, there are nearly 400 million people in at least 45 cities under at least a partial lockdown due to China’s strict zero COVID-19 policy. This represents nearly 40% of the gross domestic product in the world’s second largest economy. For a total of almost 7.2 trillion U.S. dollars. “Global markets may still underestimate the impact,” said Lu Ting, chief China economist of Nomura.

Shanghai is just the most egregious example where in 25 million human beings are being locked down due to China’s strict zero COVID-19 policy. Shanghai happens to be an extremely important manufacturing and export area. Shanghai produces up to 6% of all of China’s exports according to 2021 government reports. The lockdowns there have led to lack of medical care, lack of food, death of pets, and in some extreme cases suicides. There have even been reports of police brutality on Twitter. I’m sure I can find a way to flush this out a little better

The effect of stopping what is essentially the world’s manufacturer and one of the biggest shipping hubs in China are yet to be felt. However, the entire globe is sure to feel it soon enough. The World Trade organization warned in a wo. Why worst-case scenario wherein global economies began to decouple this could reduce the global gross domestic product by up to 5%.

“The impact on China is major 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’re in for more volatility and economic and social disruption for at least the next six months.”

American business leaders believe that decoupling is already underway. Oak tree co-founder Howard Marx wrote, “the pendulum [has] swung back towards local sourcing” recently. Additionally, Larry Fink of BlackRock repeated those same sentiments later on to shareholders. It’s not just American business leaders though that are concerned with the decoupling that is going on as well as the halt of manufacturing and shipping in China. Treasury Secretary Janet Yellen told the Atlantic council that the United States is watching China’s political and economic connections closely from a broader perspective to include national interests and national security.

According to research from the Chinese university of Hong Kong, China’s recent pandemic response will cost about $46 billion in economic losses per month. This is equivalent to 3.1% of China’s Gross Domestic Product.  They no longer believe that China’s 2022 goal of 5.5% growth in Gross Domestic Product is realistic. The World Bank has downgraded Chinese economic growth estimates to just 5%. It further noted that a continued strict zero COVID-19 policy against China’s population, which include lockdowns and quarantines, will downgrade growth estimates to as little as 4%.

The economic impact on America remains to be seen. There are deep financial ties between China and the United States. Both countries have invested in each other stocks and bonds to the tune of $3.3 trillion as last recorded in the year 2020.“These are still very intertwined economies,” said Hirson. “That integration is not something that’s going to be easily reversed because it would be incredibly costly for the US and for the global economy.” The only hope the United States has avoiding any future issues when another country has to lock down is to create local manufacturing here in the United States. Moving forward this would be the best course of action as it would guarantee national security, supply chains, economic prosperity, and jobs for the American people.