Asia Bi-Weekly: Flight From Lockdown (May 17-31)

Over the weekend, one of our staff members scored a victorious escape from Shanghai, where over the last 2.5 months, the only times she had been out of her apartment were for mandatory Covid tests or picking up grocery deliveries. The video clips she shot on her phone – while riding on the back of a delivery guy’s motorcycle en route to the train station – showed deserted streets, clean but empty. After a four-hour train ride, she arrived at a city in central China where she’s from originally. Upon arrival, she was shepherded into a student dormitory-turned hotel for a seven-day quarantine, with food and lodging paid for by the local government.

Compared with tens of thousands who are trying to leave Shanghai, she is among the lucky ones. A widely circulated documentary, produced by the state-owned Shanghai Daily newspaper, shows people who walked for hours or rode bicycles to train stations as taxis or car rides are either unavailable or exorbitantly expensive. Some slept overnight in underground parking lots hoping to be admitted into the station. Others slept on lawns outside the Hongqiao station, the main railway hub that is seeing 6,000 people departing every day. Flights out of Shanghai have also been canceled.

Those voluntary departures coincided with Shanghai starting to reopen and lifting some Covid control measures, allowing certain business enterprises to resume in-person operations and people in low-risk neighborhoods to leave homes. But the path of reopening is fraught with uncertainty, both from the implementation of the recovery policies and from the ever-changing infection rates. Some of the jobs lost, such as construction gigs for migrant workers, may never come back as development of residential buildings gets delayed indefinitely. Resuming operations can be a money-losing proposition for many small and medium-sized businesses when mandatory Covid control costs are factored in such as providing employees with three meals, afternoon and overtime snacks, PCR and antigen tests, N95 masks, toiletries, and even cot beds or sleeping bags.

Official statistics show the impact of the monthslong lockdown on Shanghai’s economy: In April, industrial production was down 61.5% year over year, exports from industrial enterprises down 57.3%, infrastructure investment down 21.4%, industrial investment down 17.7%, and real estate development investment down 10%.

The impact reaches far beyond Shanghai. Lockdown at one of the busiest ports in China has forced shipping companies to reroute, exacerbating strains on global logistics and dealing a heavy blow to China’s own exports. Disruptions to industrial manufacturing may cause demises of small businesses that are vital to the supply chain. A poll of small and medium-sized companies in Shanghai conducted this month showed that of 941 respondents, 61% said they could not survive beyond six months.

National economic statistics paint a similar picture to that of Shanghai. According to minutes of a May 25 teleconference held by the central government officials with those at the provincial and local levels, in April, industrial production value-add was down 2.9% year over year, compared with a 53% year-over-year increase in March. Manufacturers’ purchasing managers index and non-manufacturing commercial activity index were down 47.4% and 41.9%, respectively. Service sectors were down 6.1%, and retail down 11.1%. In April, the unemployment rate reached 6.1% for the national average, and 6.7% for the 31 largest cities.

All of this stands in stark contrast to what I remember from living in Shanghai in the mid-1990s. Back then, the modern metropolis was full of youthful pride and ambition to eventually rival Hong Kong to be the next financial hub in Asia. No sooner was the newest elevated inner city highway erected than it was congested with cars bumper to bumper during rush hours. On public holidays, hundreds of thousands thronged the storied Bund, where in dusk buildings and the Oriental Pearl television tower across the river were illuminated to light up Shanghai’s skyline.

It will be some time for the Bund to be crowded again.

The lockdown has had an immediate and tangible effect on Chinese real estate companies, which constitute some of the most active credits in our coverage universe. Property developers including Shimao, Logan, Jingrui, Agile and a Powerlong subsidiary have delayed release of 2021 audited financial statements citing pandemic control measures in the mainland since March.

Impediments to audit was just one direct impact on developers. April 2022 also saw the largest year-over-year declines since January 2021 in the median numbers of contracted sales, contracted sales areas and implied average selling price from 34 developers that had reported April operating stats, according to Reorg’s May 19 analysis. Developers don’t typically disclose reasons for changes in monthly contracted sales, but one can surmise that foot traffic to showrooms has diminished.

On June 9, we will host a webinar discussing Shanghai’s reopening and implications for the real estate sector. Register to attend the webinar HERE.

Perhaps what’s more disconcerting for the property sector and China’s economy at large is the brain drain. The labor exodus from Shanghai is reminiscent of the elite departures from Hong Kong over the past year, although the more recent emigration is still at its early days with no clear patterns yet. Some predict that the people departed will come back or be replaced. Our staff member plans to return to Shanghai when it reopens.

Things tend to come full circle.

-Shasha Dai, Managing Editor – China

From Reorg Asia’s Managing Editors
In this column, managing editors Stephen Aldred and Shasha Dai take turns writing about trends in high yield, distressed debt, restructuring and bankruptcy in major Asian markets including China, Southeast Asia, India and Australia. Any opinions or other views expressed in this column are the author’s own and do not necessarily reflect the opinion or views of Reorg or its owners. To request trial access to Reorg for you and your team, click here.