The Home of Investment Banking

Shanghai Lockdown


Employees Sleep in the Office to Keep the City Running

The entire city of Shanghai is now under lockdown as China faces its worst COVID-19 outbreak since the start of the pandemic.

The two-phase lockdown began in Shanghai on the 28th March, first placing the eastern districts under strict restrictions, then extending to the rest of the city.

The lockdown was meant to end on Tuesday but has since been extended, leaving all of Shanghai’s 26 million residents in lockdown.

Shanghai is China’s most populous city, and authorities reported that the number of cases reached almost 20,000 on Thursday.

The city will continue to implement seal and control management and strictly implement ‘staying at home’, except for medical treatment,” stated the city government via its official WeChat account.

The Economic Impact

Shanghai is a major financial centre of China, the country’s second-richest city after Beijing. Shanghai is often considered the country’s commercial capital and is a major trade hub.

The city is home to the biggest stock, bond, foreign exchange and derivative trading markets in China and processed over $292 trillion in financial transactions last year.

However, the lockdown is having a major impact on operations in the city – and the rest of China. Shanghai is home to the world’s largest container shipping port.

The Port of Shanghai has remained open through the implementation of the lockdown, but restrictions on land are creating problems for goods transportation.

Shanghai Yangshan Deepwater Port, Container Cargo Terminal Source: Shutterstock

Restrictions such as closed borders, vehicle pass requirements and proof of a negative COVID-19 test mean that vehicle transfers are becoming increasingly difficult.

Transportation to and from the port is therefore limited and so diversions to other ports around China are increasing, causing disruptions to supply chains both in Shanghai and beyond.

Shanghai Pudong Airport is also experiencing increased disruption. Flight activity is at 3% of last month’s rate, according to Mads Ravn who is executive vice-president and global head of air freight procurement at DSV, a global transport and logistics company.

The only goods allowed through the airport are essentials such as medicine.

Shanghai is also a key centre for manufacturing, including the manufacture of cars and electronics. However, factory activity in China decreased in March – at the fastest rate in two years.

Major companies such as Tesla and BMW announced that operations in Shanghai would be suspended as a result of the lockdown restrictions.

“Closed-loop” Systems

Other companies are operating in “closed-loop” systems so that businesses can remain open and keep operations running during the lockdown.

A “closed-loop” system allows companies to create bubbles, within which employees can work as normal while remaining isolated from the rest of the population. Employees live, sleep and eat at their place of work.

While some employees in the financial sector can work from home, many are remaining in their offices. The Shanghai Stock Exchange remains open and in Pudong’s Lujiazui Financial City bankers and traders are also operating in “closed-loop” systems.

More than 20,000 employees are working and sleeping in their offices in order to minimise the economic impact on China’s financial hub, according to Reuters.

“Closed-loop” systems are not a sustainable long-term solution, however. Already, fewer workers are volunteering to live at their place of work as the lockdown is extended and restrictions remain in place.

“We hear more and more that some workers aren’t volunteering anymore since there isn’t a clear end in sight and they don’t want to eat and sleep on site,” said Bettina Schoen-Behanzin, Vice President of the European Union Chamber of Commerce in China and Chair of the Shanghai Chapter.

Also at risk are smaller businesses and companies reliant on consumerism. Shanghai is already experiencing a decrease in consumer spending.

The city’s GDP could drop by as much as 3.7% as retailers, hotels and restaurants face a drop in business, according to Xu Tianchen, China economist for the Economist Intelligence Unit.

Deserted roads and streets in Xujiahui
Source: Tim Chambers

The government has said that it will support the economy with assistance for small businesses such as tax refunds, reduced rent and low-cost loans.

The aim is to “stabilise jobs” and “optimise the business environment”, according to an announcement by the Shanghai government.

Beyond China

However, there are concerns about the global impact of China’s lockdowns. China is the world’s second-largest economy and there are concerns that lockdowns such as the one in Shanghai could have a knock-on effect on global supply chains. Shanghai, along with Shenzhen, account for more than 16% of China’s exports.

Shanghai also made up 14.4% of the country’s imports in 2021. “China is the biggest single consumer of practically everything. It matters outside China,” stated Rob Carnell, Head of Research and Chief Economist Asia Pacific for ING Bank.

If lockdowns are kept short and isolated, the impact may be “manageable”, according to Bank of America. However, restrictions in Shanghai follow other recent lockdowns in China.

The city of Shenzhen, the base of about half of all China’s online retail exporters, went into a 6-day lockdown just three weeks ago.

Continued extension of restrictions in Shanghai raises the possibility of other lockdowns in China. In turn, this poses the threat of further disruption to supply chains both within China and worldwide.

There are, therefore, concerns among investors about the potential long-terms economic effects if lockdowns continue in China.

More Articles