Confinement in China’s “Silicon Valley” shakes investors

BEIJING: Its factories are equipping the world with cellphones, while some of China’s top tech brains travel there to produce apps and games – but Shenzhen is now on lockdown as the coronavirus inflicts economic hardship on the country and shakes people up markets.

Residents of the city of 17.5million – sometimes dubbed China’s answer to Silicon Valley – have been told not to leave unless necessary and public transport has been halted as the country struggles against its worst virus outbreak in two years.

Most businesses have been told to switch to working from home, which is impossible for many factories whose disruptions are fueling unease about supply chains and services. But how important is Shenzhen to the Chinese economy?

High-tech exports

Home to Chinese tech giants including Huawei and Tencent, Shenzhen ranks third among Chinese cities in terms of economic output, meaning any prolonged shutdown will be strongly felt.

“It’s a manufacturing hub and also a technology hub for China,” said Hong Hao of financial services firm Bocom International.

Already, major Apple supplier Foxconn has suspended operations in Shenzhen while other tech makers such as Netac Technology have also halted some production.

Mechanical and electronic products account for 80% of exports from the Southern Powerhouse, neighboring Hong Kong.

“This is a very big lockdown and I think the full impact hasn’t been revealed yet,” Hong added.

Training effects

Zhiwei Zhang, chief economist at Pinpoint Asset Management, said consumption would be “affected quickly and severely” in the event of a lockdown, followed by production and investment.

“It’s a ripple effect,” Bocom’s Hong said, noting that other parts of China that rely on production from Shenzhen could be affected.

“They would work less efficiently than before.” At least six companies on Apple’s supplier list are based in Shenzhen, where other producers such as electric vehicle company BYD are also based. But some businesses deemed essential remain open.

Restrictions across the country hitting key hubs could weigh on China’s growth target of around 5.5% – already the lowest annual GDP target in decades – while Shenzhen’s proximity to Hong Kong is fueling fears of difficulties in stopping transmission.

Port operations

Yantian Port, one of the busiest in the world, is also located in Shenzhen. It is China’s largest port, with economists noting that it accounts for 10.5% of China’s foreign trade container traffic.

In previous outbreaks, the port has been forced to suspend container handling, leading to backlogs, and the current outbreak adds to concerns about already high shipping prices.

The port appears to be working at the moment, although virus cases may trigger disruptions. Economists say the impact depends on how long the restrictions last.

Zhaopeng Xing of ANZ Research said he believed authorities “could handle Omicron” as well as before in about a month. “The shock is short-lived,” he said, adding that it was unlikely to affect the long-term outlook.

Posted in Dawn, March 17, 2022

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