What Effects Could the Shanghai Lockdown Have?

On Sunday, Chinese authorities announced a coming lockdown of megacity Shanghai. While the restrictions put in place in southern manufacturing hub Shenzhen have had severe repercussions for global supply chains, China’s largest single-city lockdown yet may have further effects on the global economy.

Health Authorities Crack Down

Factories and shipping companies in Shenzhen began resuming normal operations ten days ago after a weeklong coronavirus lockdown, but traffic at the city’s port, the world’s fourth busiest by container transit, is still backed up. This is but the latest chapter in the story of supply chain logistical issues that has become a key feature of the COVID-19 era and partially led to inflation across Western economies. As coronavirus infection rates continue to rise across the People’s Republic of China (PRC), Communist Party authorities seem to be sticking to the zero-tolerance policy first implemented two years ago in Wuhan, ground zero of the global pandemic.

On Saturday, Shanghai saw its highest infection rates in nearly two years. Accordingly, the megalopolis of twenty-five million people will undergo a two-pronged lockdown that will last a total of eight days, from today until April 5th. This change in policy toward China’s trade capital underscores how critical the PRC government considers the efforts to stop COVID-19’s spread; previously, lockdown measures had been avoided due to their outsize economic effects given how much economic activity is centered in Shanghai. While only half the city will be shut down at a time, some observers are already apprehensive regarding the potential repercussions for the still-recovering global economy.

Megalopolis Put on Pause

Yesterday, Tesla (TSLA) executives announced that the firm’s Shanghai-based ‘gigafactory’ will shut down operations for at least one day this week. This is not the first time Tesla has had to suspend its activity in the eastern Chinese metropolis in response to the spread of COVID-19, but the Omicron variant’s recent spread in the city has been more rapid than any since the first wave of the pandemic. Given that the facility produces around two thousand electric vehicles per day on average, this week’s pause could have an effect on the EV giant’s production targets, although its stock value is as yet unaffected.

However, the effects of the rapidly-approaching Shanghai lockdown are already being felt far beyond Tesla’s boardroom. China is indisputably central to the global economy and consumes more than an eighth of world Oil (CL) supplies. Now that the spectre of a drop in economic activity in such a major city is rearing its head, traders on the petrol market may be taking this additional factor into account.

As of the time of writing, Oil’s price per barrel was down over 2.7%, while international benchmark Brent Oil (EB) had fallen by nearly 0.5%. Market actors may be responding to fears that continually rising infection rates in the world’s second-largest economy could lead PRC officials to institute even more lockdowns, thus temporarily paralysing the Chinese manufacturing sector and dealing a major blow to demand for petroleum. 

In the eyes of many analysts, China’s top economic policymakers have changed course, taking a more lenient line on tech industry regulations as well as cutting borrowing costs in order to boost domestic economic growth. However, a series of lockdown measures could again have deleterious effects on Asian Indices like the Hang Seng (Hong Kong 50), as well as bring demand for Oil down even as concerns over supply disruptions stemming from the Russia-Ukraine conflict continue to capture the headlines. As many have come to conclude over the past two years of the COVID-19 pandemic, traders will just have to wait and see.