China’s strict COVID-19 lockdowns will exacerbate global supply chain woes and add to inflation in the coming months, experts say.
President Xi Jinping’s zero-COVID policy is being tested as the country struggles to tame its worst virus outbreak yet. Frustration is rising over food shortages, people being locked down in their homes for weeks, and a policy of killing pet dogs suspected of being infected with COVID.
While China’s tech hub Shenzhen has emerged from its nearly month-long lockdown, China’s biggest city, Shanghai, home to the world’s largest container port, has remained shuttered since March 28.
Now, the economic effects are starting to show. Fuel demand in China is on track to drop 20% this month in the biggest decline since the first wave of COVID-19 lockdowns more than two years ago, sources told Bloomberg on Friday. And global supply chains are beginning to feel the crunch as well.
A supply chain nightmare
One in five container ships is now stuck at ports worldwide, with 30% of the backlog coming from China. And Lars Jensen, the CEO of the shipping container industry consulting firm Vespucci Maritime, told Fortune that the full impact of China’s policies will only begin to reveal itself over the coming weeks.
“Until now most vessels have still been calling Shanghai almost as per normal—this means cargo to Shanghai does not end up in the wrong place,” Jensen said. “But this is likely to change in the coming weeks if the lockdown is not removed. Then you will see more omissions of Shanghai as a port and canceled sailings, and the [supply chain] impact will increase.”
Even if strict lockdowns in Shanghai are lifted, U.S. ports will likely be slammed with a wave of pent-up cargo from newly reopened factories in China. That will lead to higher freight rates, Jensen says, and worsen congestion at ports worldwide.
Victor Meyer, COO of the risk intelligence provider Supply Wisdom, believes it will take months for supply chains to return to normal, and he expects U.S. ports could begin experiencing disruptions soon.
“The next effect will likely be felt in the U.S. West Coast’s ports of Los Angeles and Long Beach as the pent-up demand reaches them,” he said.
Another inflationary shock
Problems at ports mean rising costs for companies and increasing inflation for U.S. consumers, experts say.
“Companies are beginning to panic. The downstream impact is coming, and it’ll be heavy.” John Bree, the chief risk officer at Supply Wisdom, said. “The latest China lockdowns combined with the Russia-Ukraine war is too heavy a burden. The global chaos is going to further exacerbate disruption and take inflation to a new level.”