Risk Center

Uncontrolled outbreak causes disruptions in China

Following protests against stringent restrictions to curb COVID-19 infection across the country in November, Chinese authorities renounced the official zero-COVID policy in early December. As lockdown measures were progressively lifted, large parts of the population have been infected with COVID-19 since early December, although exact numbers are not available, and authorities have lifted almost all previous testing requirements.

The situation is likely to worsen after an official policy change January 8, 2023, allowing authorities to reopen borders and drop COVID-19 quarantine measures. Local authorities will also be stripped of the power to lock down entire communities, and mass testing will no longer be conducted.

Over the last three years, the Chinese government has resorted to complete lockdowns to manage the spread of the disease, resulting in a lack of experience in handling larger scale outbreaks among its population while maintaining an otherwise normal day-to-day activities as seen in other countries throughout the past years. As a result, the current situation will likely worsen further in the coming weeks amid the influx of cases due to its sudden reopening, potentially causing a sick wave among the workforce in factories, ports, and airports and a strained healthcare system.

Increasing mobility among citizens could result in more cases

On December 26, 2022, the National Health Commission (NHC) of China announced that it would downgrade the management of COVID-19 from Class A to Class B on January 8, 2023.

China is forecast to see record-high passenger flows within the country compared to the previous three years, when the government discouraged what was considered unnecessary inter-provincial travel. Mobility will likely peak around January 14, one week before the Chinese New Year.

Under such circumstances, new variants of the current prevalent Omicron strains could emerge, leading to another wave of COVID-19 outbreaks in many parts of the country. Even if no new variants arise, the increased movement of people will likely lead to a new wave of infections that could overwhelm the healthcare system and cause ripple effects through supply chains in the form of sick leaves among workforces.

Logistics operations to experience mixed impacts

The latest changes in China’s policy against COVID-19 are expected to affect logistics operations in two ways. First, as quarantine requirements for imported goods was fully lifted on January 8, lead times for the transportation of goods are expected to decrease. Second, an order came into effect on the same day to gradually resume cross-border traffic for cargo and passengers. Restrictions on truck drivers will be eliminated as travel bans stemming from disease control policies will be lifted.

However, given the large-scale infections, there will likely be an increased impact risk on logistics operations across China due to manpower shortages in trucking, port, and airport operations. Such impacts have already begun to emerge.

Production operations will likely experience delays in Q1 2023

On the production side, disruptions will likely be experienced through at least the first quarter of 2023. The upcoming Chinese New Year will cause industries, particularly in the manufacturing sector, to close for an extended period of two to three weeks given the large-scale infection rate, as well as a drop in export orders since Q4 2022.

Such disruptions are already occurring in the metal sector. Generally, factories in China halt production for a fortnight during the Chinese New Year. However, current circumstances have seen production halts begin as early as one month before the Chinese New Year.

Manufacturers in some provinces of China will likely face disruptions to their production processes as local authorities try to manage the spread of the virus amid the latest easing of restrictions. In Tianjin, for instance, authorities announced they would continue to implement zone management or closed-loop measures in the event of an outbreak of the disease, potentially impacting its major export industries that include electronics and mechanical products. As a result, overall production output could potentially continue to face disruptions due to labor shortages and local production restrictions.

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