Can China’s Economy Cope with the Coronavirus?

By: Tanvi Johri, Hu Si Ying

Research Head: Tanvi Johri

Editor: Praharsh Mehrotra

Illustration by Isshaa Tusnial

Abstract:

In this article, we will examine the microeconomic and macroeconomic impacts of Covid-19 on China’s economy. We will attempt to evaluate the policies that China can implement to help mitigate impacts and bring the economy to a faster pace of recovery.

The covid-19 first emerged in Wuhan, Hubei Province of China in December 2019. The virus has spread rapidly, infecting more than 90,000 people and with 3000 deaths worldwide (Newey & Gulland, 2020). Short-term economic consequences such as falling consumption and manufacturing growth domestically are also seen. China’s important role in global value chains means that disruptions to operations would also impact manufacturing and economic growth worldwide (Haren & Simchi-Levi, 2020). Chinese government measures to contain the spread of the virus has caused economic activity to slow down. In Wuhan for example, quarantines and city- lockdown are in effect and major highways leaving Wuhan are shut down (Regan, Griffiths, Culver & Guy, 2020). Wuhan is a major transportation and automotive hub, where logistics and business operations impeded as a since transportation of goods are delayed and workers are unable to go to work (Kawakami & Tabeta, 2020). However, ripple effects are felt beyond Wuhan, in the rest of China and internationally.

Covid-19 is also showing more detrimental economic impacts than the SARs Epidemic in 2002 (Goodman, 2020). China’s economy is now more reliant on domestic consumption to drive growth since SARs, thus more vulnerable to falling domestic demand. Industries like retail and hospitality have taken the hardest hit since the Covid-19 outbreak (Huang, 2020). During the SARs, China was producing cheap commodities like clothes. In today’s date, China has evolved to become the world’s leading economy in providing high quality technological inputs with huge supply chains across the world (Goodman, 2020). International companies that rely on Chinese manufactured goods are already facing declining sales and making losses (Goodman, 2020). With 40% of imports of intermediate goods from China, Asian companies are finding it difficult to cope as Chinese factories close. As shown in the figure below, China exports to various countries in Asia, posing as a great challenge for many companies. Such supply chain disruptions translate into lower consumption (Cheng & Zhu, 2020). The figure below shows how much Asia alone is dependent on China for exports.

While tourism and airline industries are invariably affected, another industry that is greatly impacted is the tech industry. Some major tech companies like Apple and Google have temporarily shut down all offices, factories and stores across China (Garun, 2020). Customers are warned of shortages for various electronic devices. For example, Apple has declared a drop in its profit target in view of Covid-19. Apple’s stock price fell as investor confidence declines (Neate, 2020). Although the US is not directly impacted by the virus, its effects are rather insidious. With Apple taking up a decent percentage of the US GDP (0.5% of US GDP and 0.15% of world GDP), a single company shutting down can greatly reduce the GDP of a country (Worstall, 2015). And this is only one of the many supply chains that are being disrupted. GDP loss would also occur for many Asian countries which are major trading partners for China. Moreover, the outbreak has led to a delay of the development of 5G since the largest concentration of the fiber optics supply chain can be found in Wuhan. This may give an edge to other countries in the 5G race. The table below gives a breakdown on the estimated decline in shipments from China for various tech products (Trendforce, 2020).

Refer to: https://press.trendforce.com/node/view/3334.html for more details

The decrease in GDP is further exacerbated by “lost consumption” that will never return back even after the virus is gone (CNA, 2020) since lesser people go out to shop, eat and travel. Consumption would not suddenly increase after the virus subsides, to offset lost spending opportunities during the outbreak. This means lost economic growth, bringing about not only a supply shock but demand shock as well, which makes the impact of this virus supposedly higher than a normal recession.

It may be easier for countries like the US to mitigate the supply shock by sourcing for manufactured inputs from other places, like Vietnam, to continue their operations. US Trump’s trade war with China has already forced many American companies to seek suppliers beyond China. This can cushion the blow of Covid-19 in the US a little (Bartash, 2020). In fact, Apple has set up its new manufacturing factory in India to escape tariffs imposed on Chinese manufactured goods (Rawat, 2019) which is a very timely coincidence.

What is China doing for its own economy? To provide short-term capital, the People’s Bank of China (PBOC) has implemented monetary measures such as injecting 1.2 trillion yuan (S$2.39 billion) into money markets to boost liquidity (Winck, 2020). Concurrently, PBOC lowered reverse repo rates by 10 basis points (CNA, 2020). This increases money supply in the economy, as commercial banks reduce their deposits with the central bank (PBOC) and lend more to businesses. This helps reduce long-term damage to small and medium size enterprises (SMEs), especially those facing cash-flow and working capital problems (Spence, 2020). The effectiveness of monetary policy is limited for short-term growth however, as the fall in consumption expenditure might offset the growth in investment expenditure. Currently, we would have to continue observing the extent of economic impact to see if lowering lending rates further is appropriate. China has been approaching fiscal stimulus with more prudency in recent times, and they aim to target aid at affected sectors by Covid-19 instead of a large-scale stimulus (Lee, 2020). This can include giving tax exemptions for affected sectors. While increasing government spending in construction and health-related industries can help improve growth, the government should also reduce expenditure in other areas in effort to rein in debt. Another way China can mitigate the economic impacts effectively is by focusing on the export market. A devaluation of the Chinese Yuan can help boost existing export volumes to other countries and help China increase its margin.

China’s economy does have enough resilience to face the virus (Spence, 2020). Many online platforms in China use algorithms that quickly detect and respond to blockages and bottlenecks which provides a powerful defense against opportunistic price hiking. This limits crisis-induced shortage of essential goods, especially for the lower-income groups. With a larger share of the economy being brought online, performance tracking is easier and more accurate. This data can be used to envision possible economic measures specific to an industry and improve the accuracy of forecasts. This can help boost business confidence, simulate investment, and accelerate the recovery. With these measures by businesses and the government, China is attempting its best to mitigate the impacts of the Covid-19 virus.

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