Located on the east coast of China, Shanghai is the largest and richest city in the country and one of the largest metropolises in the world. Along with the neighboring city of Kunshan, which closed earlier this month, it plays a huge role in the global economy.
With no indication that the Chinese government is ready to ease the restrictions soon, concerns about the economic damage they are causing are growing and the shockwaves that a prolonged blockade will send around the world.
Shanghai is the epicenter of the current Covid epidemic, but it’s not the only one – Nomura analysts estimate that full or partial blockades are in place in 45 Chinese cities, affecting a quarter of the population and about 40% of the economy.
Premier Li Keqiang warned on Monday for the third time in a week about the threat that Covid’s rise poses to China’s economy. Here are three reasons why the rest of the world should also watch Shanghai closely.
Business and finance
It has the largest GDP of all Chinese cities – 4.32 trillion yuan ($ 679 billion), the third largest stock market in the world in terms of value of companies trading there, and the fifth largest number of billionaires in the world.
Shanghai is also the most attractive destination for international business, which expects a presence in mainland China.
By the end of 2021, more than 800 multinational corporations have set up regional or national headquarters in Shanghai, according to city officials.
Among them are 121 Fortune Global 500 companies, including Apple (AAPL), Qualcomm (QCOM), General Motors (GM), Pepsico (PEP) and Tyson Foods (TSN). More than 70,000 foreign-owned companies have offices in the city, more than 24,000 of which are Japanese companies, according to the Japanese government.
With a total market capitalization of $ 7.3 trillion, the Shanghai Stock Exchange, established in 1990, is ahead of only New York and London. Trading continues despite the blockade, but some banks and investment firms are asking employees to sleep next to their desks to keep the market running.
The pool of companies listed in Shanghai is heavily focused on large state-owned enterprises that play a central role in China’s economy. These include the world’s most valuable alcohol producer Kweichow Moutai, banking and insurance giants such as ICBC and China Life Insurance (LFC) and the state oil company PetroChina (PCCYF). The Shanghai Stock Exchange is also home to the Chinese response to Nasdaq – Star Market.
Trade and logistics
Shanghai accounts for 3.8% of China’s GDP. But it has a much higher share – 10.4% – of China’s trade with the rest of the world, according to official statistics last year.
The port of Shanghai is the busiest in the world for container traffic. It moved 47 million 20-foot equivalent cargo in 2021, four times the volume handled by the Port of Los Angeles. The figure represents 16.7% of China’s total container traffic last year.
Shanghai is also a major aviation hub in Asia. The city’s airports – Pudong International Airport and Hongqiao Airport – will serve 122 million passengers in 2019, making the city the fourth busiest center in the world after London, New York and Tokyo.
But the Covid epidemic has exacerbated delays in ports and forced the suspension of many passenger flights, leading to rising air freight prices and putting even more pressure on global supply chains. The port of Shanghai continues to operate, but industry data released in late March show that the number of vessels waiting to be loaded or unloaded has risen to a record high. State media also reported that many truck drivers were struggling to load the containers and leave the port on time due to travel restrictions.
Production and technology
The Greater Shanghai area, which includes Kunshan and several other eastern cities, is a major manufacturing hub for the automotive to semiconductor industries.
Volkswagen (VLKAF) and General Motors operate factories in Shanghai in partnership with state-owned automaker SAIC Motor. Shanghai is also home to Tesla’s first giga factory (TSLA) in Asia. The American electric vehicle manufacturer delivered more than 65,000 cars from its factory in Shanghai last month, making it the best-selling EV brand in China. In January, Ford launched its sixth global design center in Shanghai, highlighting the city’s vibrancy and growing number of young Chinese designers with a mix of “fresh thinking, local knowledge and a global perspective.” TSMC (TSM), the world’s largest contracted chip maker, operates a large semiconductor factory in the suburbs of Songjiang. The best Chinese chip manufacturers SMIC (SMICY) and Hua Hong Semiconductor have factories in Pudong, in the eastern part of the city. But Covid’s restrictions have forced many factories to shut down in Shanghai and Kunshan, threatening to disrupt key car and electronics supply chains. The Volkswagen and Tesla plants in Shanghai have been closed for weeks. Chinese electric vehicle maker Nio has also been forced to suspend production due to Covid-related disruptions in Shanghai and other Chinese cities. Pegatron, a key supplier to Apple (AAPL), has suspended production at its Shanghai and Kunshan plants until further notice. In addition, Taiwan’s Unimicron Technology, which supplies Apple PCBs, and Eson Precision, a subsidiary of iPhone vendor Foxconn that also supplies Telsa components, halted production at their Kunshan facility earlier this month.
“With Shanghai’s significant trade links with East Asia, this could have side effects on regional supply chains,” Citi analysts said in a research note late last week.
“We believe that Korea, Taiwan, Vietnam and, to a lesser extent, Japan (in terms of vehicles) appear to be relatively exposed. [to the disruptions],” they said.
Other industries include pharmaceuticals. In October, AstraZeneca (AZN) opened a global research and development center in Shanghai.
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