On January 13, the city of Dalian in China reported its first case of Omicron, becoming the second major port in the country affected by the highly contagious variant after Tianjin, last week, registered the first local case in the Asian country. The spread of Omicron to Dalian has raised fears in the supply chain of a possible new massive outbreak of COVID-19 and, perhaps even more so, of China's "Zero COVID" policy, which has not led authorities to not be careful to carry out the drastic closure of the ports.

The world could face the “mother of all supply chain mishaps” this year, Frederic Neumann, co-head of Asia economic research at HSBC, warned earlier this week, citing the growing epidemic in China, reports Fortune.

The US government is concerned that the outbreaks could also cause further chaos in global supply chains. On January 11, US Federal Reserve Chairman Jerome Powell told US lawmakers that “if China sticks to a Zero-COVID policy, Omicron can really disrupt supply chains again.” .

Closures are back in China

Right now, factories and suppliers in China are already bracing for a seasonal slowdown as the Lunar New Year holiday approaches. Meanwhile, COVID outbreaks have spread across the country.

In northern Xi'an, where residents have endured a three-week shutdown that began in December, Samsung has suspended operations at its semiconductor factory as staff cannot go to work. In southern Zhengzhou, home to top iPhone assembler Foxconn, the government this week uncovered dozens of local cases after launching an effort to test the city's 12,6 million residents. In Anyang, 5 million residents were ordered to stay home earlier this week.

In Tianjin, health officials test 14 million residents for COVID. In the same city, the Japanese Toyota and the German Volkswagen have suspended the production of their factories. Notably, Tianjin is home to the world's ninth busiest port, and a city closure, if enforced, could cripple the operations of many factories and companies.

Port closure

As of press time, the Tianjin outbreak had yet to trigger any port closures. On January 12, the Tianjin Port Authority announced that it had tested 4.920 of its employees as of Sunday (January 9) and that "all dock businesses are operating as normal."

With outbreaks now in other ports - including Shenzhen's southern technology hub and Dalian's northern manufacturing hub - the risk of China denying ships docking increases. Furthermore, with cities like Tianjin blocked off, truckers are unable to transport cargo from factories to ships and vice versa, increasing friction in the supply chain.

Zero COVID

Many of the painful macro effects of the China closures will likely be felt within China itself, but China itself has shown no signs of deviating from its Zero-COVID policy, even as it poses risks to its own economy.

China's Zero COVID stance could harden on the eve of several major events on the national calendar, such as the Winter Olympics on February 4 and the annual Two Sessions political meeting, which will begin on March 4.

Bruce Pang, China's head of macro and strategic research, brings another take on the policy, noting that it has meant the Asian country avoided last year's COVID surges that forced factories across Southeast Asia to close. “If China were to soften its Zero-COVID policy, it could have trouble staffing its factories with healthy workers.”

“I don't think this closure is so counterproductive. On the contrary, I think that if they did not do preliminary lockdowns, there would be millions of cases in China, and then there would be a worse crisis in the supply chain, ”says Chen Long, founder and economist at Plenum analysts.

The Lunar New Year usually marks the largest annual movement of people in the world, but the Ministry of Transportation of China expects that the number of citizens traveling for the holidays will be about half compared to the years before the pandemic, due to the outbreak. Employers have even been encouraged to take advantage of these China-to-China travel restrictions to keep factories open, rather than closing them on holidays, as is often the case.

What's more, Chinese companies are encouraging migrant workers or workers to stay at their workplace, which means that even with limited closures, factories can continue to operate during the Lunar New Year.

But with the pandemic now entering its third year and exacerbated by the more transmissible Omicron variant, analysts are not sure that China can, or should, maintain its zero tolerance approach for much longer.