Shenzhen Lockdown Threatens U.S. Supply Chains, Increases Inflation Risk

Lockdown in Chinese manufacturing hubs Shenzhen and Changchun threatens to worsen inflation in the U.S. and to disrupt global supply chains.

The U.S. imported nearly $48 billion of goods from China in January, the latest month for which data is available. Last year, imports of Chinese goods totaled $506 billion, the second-highest level of imports from China on record.

The Chinese government has placed the city of Shenzhen on lockdown for at least a week and ordered everyone in the city to undergo three rounds of covid tests.

The lockdown has halted many manufacturing operations in Shenzhen, including those of Foxconn, a crucial assembler of Apple’s iPhones.

Shenzhen’s exports of goods reached 1.92 trillion yuan, the equivalent of around $302 billion in 2021, according to official Chinese figures. Electronics and telecommunications equipment reportedly account for over 90 percent of the total output of Shenzhen’s high-tech industries. Huawei Technologies and electric-vehicle maker BYD , which produces electric cars and batteries, are located in Shenzhen.

Huawei has reportedly been allowed to remain open.

The cost of U.S. consumer goods less energy and food jumped one percent in January and 0.4 percent in February, for a year-over-year increase of 12.3 percent. The sudden halt of production in Shenzhen threatens to amplify inflationary pressures in the U.S.

While a brief lockdown would likely not cause major disruptions, a lengthy shutdown of Shenzhen manufacturing could become a major snag for global production of autos, semiconductors, and telecommunications equipment.

Damn. Shenzhen locked down. 17 million people and major supply chain hub. More inflation coming.https://t.co/EoPJ8nnu5q

— Alex Tabarrok (@ATabarrok) March 13, 2022

I’m inclined to agree w/early takes that Shenzhen lockdown will worsen inflation. That said, 2-week lockdown in Ningbo, a major port, had only transitory impact on delivery times, PPI. Bigger risk: if China’s COVID at tipping point, worse disruption ahead. https://t.co/pMXA6h8Fmc

— Greg Ip (@greg_ip) March 14, 2022

Hong Kong’s Hang Seng index fell 4.97 percent on Monday, with many significant Chinese tech stocks plunging. Chinese companies listed on the Nasdaq also fell sharply, with Pinduodou, JD.com, and Baidu among the biggest decliners on Monday.