Although China denies it, its draconian “zero-COVID” lockdown policy is pushing up the cost of Chinese manufacturing as well as global production costs and inflation, analysts say.
China’s three major indicators of its Purchasing Managers’ Index (PMI) all fell below the critical mark in March.
However, while both ends of production and demand were falling at the same time, the price index continued to rise. In particular, the purchase price index and the ex-factory price index for major raw materials increased by 6.1 percent and 2.6 percent respectively.
Being the world’s factory, China’s rising ex-factory price index will push up global production costs and exacerbate global inflation.
China is one of the world’s major manufacturing centers and the world’s largest exporter. It has ranked first in the world in terms of export volume for 12 consecutive years, importing raw materials and exporting them after processing.
Recently, factors such as production uncertainty caused by China’s Zero-COVID policy are raising the cost of Chinese manufacturing. This effect is superimposed on the rise of raw materials around the world, and soaring costs are spreading around the world through products made in China.
Zero-COVID Lockdown Increases Manufacturing Costs
Hong Kong-based financial analyst Katherine Jiang told The Epoch Times that the Chinese Communist Party’s Zero-COVID policy has disrupted the production of enterprises, and the production cuts and shutdowns of enterprises have also reduced supply, bringing upward pressure on prices. This will exacerbate global inflation, Jiang said.
China’s COVID lockdowns can be divided into two types: complete lockdowns and partial lockdowns. From the second quarter of 2020 to the end of January 2022, 16 cities in China implemented complete lockdowns, and 18 cities implemented partial lockdowns.
Song Zheng, a professor in the Department of Economics at the Chinese University in Hong Kong, published a paper on March 30 in which he used monthly updated inter-city truck traffic data to extrapolate the impact of lockdowns on real urban incomes, as well as the rise of the spillover effect. The spillover effect refers to when an organization conducts an activity, it will not only produce the expected effect but also has an impact on people or society outside the organization.
According to Song’s paper, the study found that the overall lockdown will increase the cost of industry and commerce between cities and within the city by 67 percent and 144 percent respectively. The impact of partial lockdowns is of a smaller order of magnitude; and the larger the city scale, the greater the impact on the economy.
According to a notice issued by the Shanghai Road Transport Administration, on March 29, container vehicles entering the port of Shanghai must hold an electronic pandemic prevention permit issued by the Shanghai International Port (Group) Co., Ltd. (SIPG), showing that the container truck driver had a negative nucleic acid test within 48 hours and a negative antigen test within 24 hours.
During the Shanghai lockdown, container freight trucks were stuck in a “semi-paralyzed state,” and it was difficult for vehicles to enter Shanghai. Even when they managed to enter, it was difficult to get out.
The paper’s analysis is limited to the short-term effects of the lockdowns and does not address the impact of expectations, savings, and long-term investment decisions.
Katherine Jiang’s analysis of Song’s research is that for some capital-intensive industries, reduced production means higher production costs. The immediate reason is that the unit fixed cost has increased. Moreover, some industries, such as the steel industry, have many production links and cumbersome processes; they cannot easily stop production, and the cost of restarting work after suspension of production is very high.
Nineteen blast furnaces in China have been shut down as of March 24 due to the pandemic, which means that steel mills incurred huge additional costs.
After Tesla set up a factory in Shanghai, its retail car pricing in China was based on production cost and the market. The spokesperson for Tesla China told Chinese media Daily Economic News on March 17 that they would actively cooperate with the nucleic acid testing and other pandemic prevention requirements by the Chinese government, and at the same time do their best to ensure continued production.
Meanwhile, retail prices for Tesla’s domestic models rose three times between March 10 and 17, each time by at least 10,000 yuan (about $1,600.)
Tesla’s Shanghai plant was shut down for the first time on March 16 and 17 when 48 hours of nucleic acid testing was performed in the residential area near the factory. On March 28, Shanghai began a series of lockdowns, with all enterprises shut down and factories suspending production. So Tesla’s Shanghai plant had to stop production again. The work resumption date was then postponed from April 1 to April 4, making the second shutdown last for a total of seven days, which will undoubtedly affect Tesla’s second-quarter deliveries.
Authorities Downplay High Cost of Lockdowns
Although the Chinese Communist Party officially denies that the Zero-COVID lockdowns come at a high cost—calling it a “distorted attack” by the Western media—state-run Xinhua News Agency admitted on March 25 that the Zero-COVID policy “indeed costs a considerable amount.”
According to the analysis and 2022 first-quarter forecast by the China Macroeconomic Forum (CMF), China, as one of the world’s manufacturing centers, is likely to transmit upward inflationary pressure from raw material exporters, through manufacturing exports, to developed countries as world consumption centers.
China has the highest trading volume among more than 120 countries and regions around the world. While China is transmitting rising raw material prices through trade, it is also transmitting the cost of its Zero-COVID policy.
Apart from the economic loss resulting from the lockdowns, repeated mass testing of large population groups is also a costly undertaking. On April 4, Shanghai conducted a one-day citywide nucleic acid test of the city’s entire population of about 25 million. Based on the cost of 10 yuan per test per person, the estimated current round of expenditure incurred by the government is about 250 million yuan ($40 million). Before the citywide testing of Shanghai citizens, several rounds of testing had been carried out in different areas.
According to the Purchasing Managers’ Index (PMI) released by the National Bureau of Statistics in March, the manufacturing PMI, the Non-Manufacturing Business Activity Index, and the Composite PMI Output Index were 49.5 percent, 48.4 percent, and 48.8 percent respectively, down from February’s 0.7, 3.2 and 2.4 percentage points, indicating that the overall prosperity level of China’s economy has declined.