Chinese Plants Go Idle
New lockdowns in China as a consequence of the recent explosion in COVID cases, spark fresh concerns on the global supply of electronics. China is dealing with the pandemic's largest COVID outbreak since it began. Beijing's "dynamic-clearance" (the policy that seek to reduce infections as rapidly as possible) is now leading again to tighter restrictions in a number of regions and towns.
- Foxconn announced that its Shenzen operations will be halted till further notice, and that it would deploy backup plans to minimize production disruptions
- Foxconn and its subsidiaries' operations in Shenzhen will be suspended for the first half of the week, according to two sources familiar with the situation
According to one of the sources, the government is allowing businesses to function if they can set up a "closed management" structure that isolates personnel from the general public. During the Beijing Winter Olympics, such a system was in operation.
China's Stance
According to China's foreign minister, the government is concerned that it would be affected by western sanctions placed on Russia for its invasion of Ukraine, and China will retaliate if required.
- A series of sanctions imposed by the US and its allies have heavily pressured Russian markets and pushed the price of commodities such as oil and wheat
- Despite President Xi Jinping and other senior Chinese officials insisting that Beijing is a neutral party, they and state media continue to accept and spread Russian explanations for the invasion
"[The US] wants China to dance to its tune. What the US hopes for is to weave a global web to strangle Russia, making all countries part of this web without any "loophole." The US is the instigator of the Ukraine crisis; yet, it wants to exploit the whole world to expand its own strategic interests."
"[...] If Washington wants to forcibly tie China-US relations to the Russia-Ukraine crisis, it is on the wrong track and will definitely be disappointed." Global Times editorial (Chinese state media)
According to a Western official and a US diplomat, the US has knowledge that China has expressed some interest in giving Russia with requested military and financial aid as part of its attack on Ukraine.
- This raises the risk that China would aid prolong a war that is killing civilians while also strengthening an authoritarian alliance between Putin and Xi Jinping
- Fears of further support by China's ruling party have hit Chinese companies especially hard, with Hong Kong-listed Chinese stocks plunging to the most since the 2008 financial crisis
BENCHMARK'S TAKE
- China may have seen how former Soviet states have chosen the path of democracy and free markets. It also saw the pressure that was building from within Russia as political opposition grew over the years
- It may now choose to decouple itself from the West by choosing to align itself with Russia
- Yet, while Chinese officials are seeking to seal China from the West's political influence, they might also be careful to preserve existing trade relations. Certainly in the face of renewed COVID pressures
- We believe China seeks to engineer a slow schism with the West. For investors, this means that investing in Chinese companies may not bear any fruits as valuations won't be guided by economic reality
Disclaimer
Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.
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