2022 Theme: China & “Zero Dynamic Covid” - Shanghai Surprise

On the subject of the pernicious difficulties of high inflation, it isn't necessarily a lock that we are putting rising global inflation behind us, either.

We have flagged some positive signs over the last month but, put simply, there is some very bad news coming out of Shanghai on this front.

As you are probably aware, against all sense, the Chinese "dynamic Covid-zero" policies and lockdowns are reaching new levels of ferocity and senselessness.

These decisions will have repercussions beyond China's borders and not just in the here and now.

Last week, we focused, somewhat ominously, on the impact that these decisions are possibly having on the always sensitive topic of Chinese food security and global food prices.

This week, we would like to return to China and briefly explore why their lockdowns today, could be our inflation tomorrow and what it says about the broader direction of China.

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It might not be greatly understood but China's brutal zero covid approach could "stay" in country and yet have a profoundly a negative global impact.

It could do so by clumsily and unnecessarily exporting inflation around the world.

The reason?

A locked down China matters for nearly all of us.

Most people are somewhat aware that, over the last 30 years, China has gone from being an economic backwater to being the low cost producer of choice to eventually, becoming the world's factory and its largest economy.

Even now, the numbers around this theme are staggering.

In 2020, China's manufacturing output was $3,854 trillion, up from the previous year and accounting for nearly a third of the global market.

It has been an incredible journey and also delivered tremendous gains, especially for China's population and a wealthy Western populace hungry for low cost goods produced "just in time."​

Well, now, thanks to trade wars, growing Chinese assertiveness and Covid-linked disruptions, the world has learned a powerful lesson:

• Being heavily dependent on China for many goods and also some raw commodities makes our economy (and arguably our country) extremely vulnerable.

We have far too many of our economic eggs in the proverbial Chinese basket.

Coming to this realization too late, developed nations are now rapidly trying to diversify both our source of supply and to a lesser extent our whole approach to the global manufacturing supply chain.

The big business buzzword of the age is: resilience. (this is a link to a good book on this topic)

Here is the problem, however. We are nowhere near resilient enough.

This is proving particularly true when it comes to the current Covid lockdowns in Shanghai as China grapples with the incredibly transmissible Omicron variant.

These are lots of directions we could take on this topic:

The near totality of the lockdown, the resulting desperation of the city's population, the severity and inhumanity of the approach, the backwardness of the thinking behind it but it is the impact on the city's economy and the region's export sector that may have the most lasting global impact.

Shanghai sits the mouth of the Yangtze and its Shanghai-Ningbo port complex - the largest port in the world - spreads out over that entire delta and serves as one of China's biggest outlets for sending its manufactured goods around the world.

Or it did.

At present, ships from around the world are piling up waiting for (or trying to unload) their cargos.

Here are the number of ships waiting compared to last year's issues and an average of pre-Covid norms:

And here is the progression of the buildup week by week:

The issue - one that will be familiar to readers of this newsletter from last summer's fun in Los Angeles - is not necessarily the port which works in a closed loop and so is cut off from the rest of the city.

Instead, it is the logistical networks that service the port. The truckers, the trains, the warehouse staff etc.

Workers and cranes can unload the ships but trucks can't get in and out of the port or the city and so there is very quickly no more storage in the port itself.

Here is some weekly trucking traffic data comparing different Chinese provinces with this time last year.

As you can see, the problems are already spiraling beyond Shanghai and into its neighboring provinces:

Alongside the brutal conditions experienced by many Shanghainese, the primary outcome of all this has been to exacerbate the familiar strains in global supply chains and create a lot of uncertainty about whether another inflationary surge is coming as goods become scarce.

At the time of writing, the city is gradually opening up and there is hope that the congestion can begin to clear in the days and weeks ahead.

Our fingers will remain firmly crossed.

Many people, companies and factories around the world may have not yet realized it but their parts will likely be delayed, their goods may spoil at sea or their orders placed for Mother's Day, Memorial Day or any other day may show up far too late for the holiday in question.

But aside from a less festive start to BBQ-season, the real question is just how long China will continue harming their own economy and society for little to no public health gain?!

Buy the July 4 bunting now, if you can and also be prepared for greater lockdowns in China in the near future. These might matter more than you expect or hope.

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