The closure of Shenzhen, “China's Silicon Valley”, threatens the economy

The confinement of the city of Shenzhen, the “Silicon Valley of China” where video games and smartphones are produced for the whole world, threatens the health of the Asian giant economy and worries the market.

Faced with the worst COVID-19 outbreak in the United States in two years, the City Council, which has become a symbol of modern China, has closed public transport and urged 17.5 million residents to stay home.

He also asked companies to work remotely, which is something that hundreds of factories in the city cannot do, and the closure will certainly disrupt the global supply chain.

- Export Hold -

Shenzhen, the third largest city in China in terms of GDP and bordered by Hong Kong's semi-autonomous territory, has Chinese giants Huawei (phone, 5G) and Tencent (Internet, video games).

Therefore, long-term confinement can have consequences.

“For China, it is a manufacturing center and a technology center,” said Hong Hao of Bokom International, a financial services company, to AFP.

The Taiwanese giant Foxconn, the main supplier of Apple, had already had to stop operating in Shenzhen. Others, such as the Chinese manufacturer Netac (which manufactures hard drives or memory cards), have also stopped some production.

Electronic and mechanical products account for about 80% of the city's exports.

“The blockade is important, and I think we have not yet fully assessed its impact,” Hong said.

Shenzhen is known as “China's Silicon Valley” due to the large number of high-tech enterprises in the urban and regional ecosystems, which facilitates its development.

These leading companies attract not only the best Chinese and foreign professionals, but also many young people who want to work for the biggest names in this field.

- “Domino Effect” -

According to Zhiwei Zhang, economist in Pinpoint asset management, consumption during the lockdown period is “quickly and severely affected”, followed by production and investment.

“There is a ripple effect,” says Hong Hao of Bokom International, who believes that other regions of China that rely on products produced in Shenzhen can also be affected.

In Shenzhen, there are at least 6 companies supplying Apple and other companies such as Chinese electric vehicle manufacturer BYD.

Restrictions imposed across China could affect the government's GDP growth target of around 5.5% in 2022, which is already the lowest level in recent decades.

- Concern about the port -

According to economists, Shenzhen also has Yantian, one of the largest ports in the world, and 10.5% of the containers used by China's foreign trade pass through it.

In the event of the previous covid-19 outbreak, the port stopped loading and unloading containers, causing delays. That is why the current closure raises concerns about the already high shipping prices.

At the moment, the port seems to be working.However, if an employee tests positive for coronavirus, a suspension is expected. According to economists, the impact will depend on the limitation period.

Zhaopeng Xing, an analyst at ANZ Bank, believes that authorities will be able to “eliminate omicrons”, the dominant variant of the coronavirus, in about a month, as in previous outbreaks. He believes that there should be no long-term impact and points out that “the conflict will be temporary.”

/ehl/pc/zm