China/Covid-19: spiralling infections will disrupt supply chains

What happens when more than half of a city’s population gets Covid-19 at the same time? An explosive number of new cases in China’s capital Beijing could mark the beginning of the next phase of supply chain disruptions.

China’s lockdowns over the past two years halted factories across a wide range of industries and cities. But Beijing’s abrupt halt to its Covid Zero policy means reopening its economy will not lead to a return to economic growth as markets had hoped.

Beijing’s large local asset managers and banks currently expect more than half of their employees in the city to have tested positive. Both stock and currency trading volumes fell sharply last week due to sick traders being off the desk.

Japanese chipmaker Renesas suspended operations of its Beijing chip plant due to the number of Covid infections on Friday. On Monday, it said it would resume operations the next day and did not expect the stoppage to have a big impact.

Nonetheless, the suspension provides grounds for concern. Although the worst of the chip shortage is mostly past, that is not the case for chips used in cars and industrial equipment. They are still in short supply. Power chips and microcontrollers, which Renesas specialises in, are crucial to energy-saving functions in cars and machinery. Future disruptions in the sector would mean longer lead times and a rerun of last year’s supply chain woes.

Shares of Renesas are down around a fifth this year and trade at just 9 times forward earnings. That is less than half levels last year, reflecting its sensitivity to production disruption from fires, lockdowns and earthquakes.

The bigger problem is that manufacturing jobs cannot be done from home. The proportion of workers sick or absent in more than 2mn factories across various industries in China will be similar to the numbers now being seen at the large financial groups in Beijing. The fallout from reopening will be prodigious.