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Global Supply Chains May Normalise, But China's Lockdowns Could Spoil the Party

Imposing lockdowns on the country's industrial centres to combat Omicron threatens the stability of global supply.

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A report published by the Financial Times on 15 January 2022 titled "Supply chain constraints may have peaked in 2021" took an optimistic tone and argued that global trade relations may normalise this year due to the stabilisation of the global supply chain.

It also said that while global supply chain pressures continue to remain above their pre-pandemic levels, the highest point of these pressures were reached in October 2021.

Finance analyst Simon Edelsten said that "over the next year, it seems likely that some supply chains will resolve themselves while others may prove more persistent", the FT report added.

There are however, a number of factors that could pose problems, preventing the supply chains from loosening up.

One such factor is China and its zero-tolerance policy for COVID.

This article is therefore divided into two parts, first of which shall look into China's COVID policy in some detail.

After understanding why China is so harsh with its COVID restrictions, we will consider how its policy can prevent the global supply chains from normalising.

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China's COVID Policy

The Xi Jinping government arguably has the most stringent restrictions in the world to curtail the spread of COVID.

After all, those who test COVID positive in some cities are being made it to live in metal boxes. Dystopian right?

The Chinese government asserts that its policy has prevented large scale deaths that could have been caused by a rampaging virus, and compares itself to the situation of the US and some European countries where hundreds are dying every day due to COVID.

Additionally, a study published by researchers at one of China's top universities, Peking University, warned of the "possibility of a colossal outbreak which would almost certainly put an unbearable burden on the medical system" if the administration turned back on its zero-COVID strategy.

Unlike India or the US or European countries that are gradually learning to live with the pandemic, China has a strict policy of getting rid of each and every COVID case.

In light of this goal, sweeping lockdowns have been imposed on a number of big Chinese cities that play a key role in the economy vis-à-vis industrial production.

One such city is Xi'an, in Shaanxi Province.

The city, a major industrial centre, is entering its third week of a lockdown that started on 22 December, affecting around 13 million people.

People are not allowed to step out of their homes for even one second.

"A lot of my friends said they are starving or scraping by with instant noodles," a marketing agent in the city told FT.

Xi'an is one of the cities where metal boxes have become homes for COVID-positive people.

Mandatory testing has been imposed in many cities of Henan province, which houses Foxconn, the Taiwanese company that manufactures many Apple and Sony (among others) products.

It also runs the largest iPhone plant in the world.

Extremely strict COVID regulations are also present in many cities in Guangdong province (near Hong Kong), known for its technology industry and for being one of the major centres of China's foreign trade.

On top of the zero-COVID policy, another reason why the Chinese authorities are trying to completely weed out COVID infections is that there are two big events approaching the Chinese people in two weeks.

The first one is the Chinese New Year, which starts on the 1 February.

The celebrations for the new year of the traditional lunisolar Chinese calendar are bigger than the celebrations for any other event in the country.

Two years ago, when COVID first spread from Wuhan to all across China in February, that is, during the Chinese New Year holidays, the government blocked transportation routes and facilities all over the country.

Hundreds of millions of migrant workers who had gone home for the holidays could not return to their jobs.

Factories were shut, and industrial production levels plummeted.

The second significant event approaching China is the Winter Olympics, to be held in Beijing from 4 February.

On 15 January, however, officials reported Beijing's first case of the Omicron variant, which led to an instantaneous lockdown of the infected person's residential compound and workplace, the New York Times reported.

It is clear therefore, that Xi Jinping is not going to let COVID come in the way of China hosting the Winter Olympics.

Therefore, a combination of two factors - a belief that it works, and these huge upcoming events - lie behind the logic of China's zero-COVID policy.

How can this policy affect the global supply chain?

The COVID Policy's Role in the Global Supply Chain

There is a port in Eastern China's Zhejiang province, called Ningbo. It contains the Port of Ningbo-Zhoushan, the third-largest container port.

Due to multiple COVID infections amongst the port's staff, lorries have been barred from entering, freight handling has slowed down, and shipping costs have increased.

But the problem goes beyond ports.

Remember Xi'an? Samsung Electronics and Micron Technologies Ltd. have their factories in the 13 million strong city that make DRAM and NAND memory chips. These chips are no small deal. They are used in mobiles phone and computers.

42 per cent of Samsung's NAND production and around 15 per cent of its global supply comes from Xi'an, according to the Associated Press.

COVID infections, however, in the Chinese case, lead to restrictions on ports and factories, which led to a reduction in industrial production and a reduction in shipping, while costs of the latter skyrocket.

Due to disrupted shipping, whatever products are manufactured pile up, causing a huge backlog in delivery while demand doesn't reduce (or even if does, it doesn't reduce proportionately to supply).

On top of that, if and when the deliveries do happen, there is a good chance that the importing country's ports are overwhelmed by the quantities of ships arriving to deposit goods.

The latest lockdowns that have been imposed have not affected factory production and deliveries in China to catastrophic extents, yet.

Omicron, however, continues to linger.

Shanghai, Dalian, Tianjin and Shenzhen are China's four largest port cities. Small scale, circuit-breaker lockdowns are being seen in these cities to curtail the Omicron variant.

That doesn't mean that it can't get worse.

Ambrose Conroy, who is the chief executive of a US-based supply chain consultancy, warned that "companies are a bit better prepared for short-term lockdowns now, but a broader shutdown over a few weeks would wreak havoc".

The reason to worry more this time around (compared to 2020) is that supply chains around the world are already disrupted.

If China's production and supply levels nosedive again, then any hopes of the normalisation of global supply chains in the near future can be discarded.

China after all, accounts for a huge share of the world's manufacturing output.

President Xi Jinping is aware of this, as he called on nations during the World Economic Forum's virtual meeting on Monday, 17 January, to secure global supply chains.

"We need to resolve various risks and promote the steady recovery of the world economy."

It is hard to tell whether global supply chains will actually stabilise or not in the near future.

A lot will depend on the Omicron variant's role in in China, and how the Xi administration curtails it, especially in the backdrop of the Chinese New Year and the Winter Olympics.

What is clear is that if supply chains don't stabilise, then China's high production and supply levels, coupled with its zero-COVID policy, will probably be the root cause of it.

As Guy Foster, an analyst, told the Financial Times while talking about the topic, "the fly in the ointment is China".

(With inputs from AP, FT, and NYT.)

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