China’s reaffirmation that it can meet its economic and social development targets in 2020 despite the coronavirus epidemic displays a false sense of bravado, as the Communist Party of China’s leadership is fully aware that the country’s economy has already taken a hit. The scale of the disruption to China’s economy caused by COVID-19 is not recognized either in China or the rest of the world. A massive disruption to supply chains will have a downward spiral effect on the state of the Chinese economy and in turn on the global economic canvas.
In December 2019, China’s top leaders firmed up the country’s general economic plans for 2020 at the Central Economic Work Conference. This happened just before the signing of phase one of the trade deal with the US on January 15, 2020, and the ensuing outbreak of COVID-19. The postponement of the annual gathering of the National People’s Congress, where China’s 2020 Development Goals were supposed to have been announced, is in itself a significant departure, signalling the impact of the coronavirus on China.
First and foremost, it must be recalled that Chinese enterprises have been struggling to resume production after the culmination of the extended Chinese New Year holidays. Further, the lack of industrial activity in China and restriction of Chinese businessmen in some countries is affecting China’s foreign trade, mainly in the sphere of exports. Also, all State Owned Enterprises (SOEs) and Chambers of Commerce of China are procuring essential commodities from all over the world, leading to an increase in China’s import bill.
One of the most serious economic obstacles caused by the COVID-19 is the interruption to transportation caused by local governments apprehensive of the spread of the virus. This act by itself has caused huge supply chain disruptions. One illustration of this disruption is evidenced in the reduction in the number of road trips this year, compared to last year. After the Chinese New Year, statistics of road trips show that they reduced by 78 per cent, indicating that China’s migrant workers have delayed returns to the cities where they normally work.
As of February 20, coal consumption (still 60 per cent of China’s total energy consumption) remained down 38 per cent from its pace earlier in the year, and nationwide transportation comparisons were even weaker, thus making it extremely difficult for China’s 300 million migrant workers to return to factories after the New Year holiday. In fact, these workers are expected to return to their work places only by the end of March 2020. Fearing harassment, about 80 per cent of migrant workers have self-censured themselves in returning to the cities.
Apart from the restraint shown by workers in returning to their places of employment in cities, another major factor responsible for the current situation is China’s quarantine of Wuhan and Hubei Province, which has led to most local governments enhancing the control of entry points including airports, railway stations, highways and waterways, and thus creating virtual islands within mainland China. Notably, people who have visited highly affected areas hit by the epidemic are being forcibly quarantined for a period of fourteen days. Stringent administrative procedures by local governments coupled with restrictions on the movement of migrant workers have resulted in almost nil economic activity in these regions, with grave impact in sectors such as tourism, retail, restaurants, catering, entertainment and transportation.
Chinese corporation Alibaba was amongst the first business enterprises to admit that COVID-19 has undermined production in the economy, because many workers cannot get to or perform their jobs. The company also stated that COVID-19 had changed buying patterns, with Chinese consumers pulling back on discretionary spending, including travel and restaurants. Not only have the retail and service sectors been hit by the virus, the overall Chinese economy has been affected.
This has in turn hit global supply and value chains. According to one analyst, China is not only the largest trading partner in the world, but is also central to global supply chains. From raw materials to components used in electronics, Chinese companies provide Western brands with inexpensive building blocks for expensive products, be it a car, a smart phone or something else. For instance, Apple Inc. generates about 15 per cent of its revenue from China, and many of its products are manufactured there.
TrendForce, a Chinese market research company, anticipates that global smart phone production in the first quarter of 2020 could be 10 per cent lower than originally expected due to the COVID-19 epidemic. But the negative effects on output won’t be limited to the smart phone industry. Smart watches, notebooks, smart speakers and video game consoles are all expected to suffer double digit hits on unit shipments this quarter, with TV shipments expected to be 4.5 per cent lower than forecast before the outbreak.
The challenge of getting things back on track in China is compounded by the fact that local governments have put the onus of preventing and controlling COVID-19 on SOEs, and each enterprise is mandated to submit a plan for carrying out the prevention and control of the epidemic. Ensuing difficulties in meeting these requirements and corresponding financial cost in implementing the regulations are discouraging SOEs from resuming production, most of whom have only re-opened administrative offices.
Ultimately, it is certain that the Chinese economy, and especially the service and industrial sectors which constitute 90 per cent of China’s GDP, will be negatively impacted by COVID-19, at least in the first quarter of 2020. Economic recovery in the end depends on a return to normalcy, the timeline for which appears to be uncertain for the time being.
Jan Lehman is the pseudonym for an expert on Asian affairs.