After facing economic headwinds for some years, the Chinese leadership had hoped for an economic rebound in the first half of 2020.[i] At the Central Economic Work Conference (CEWC) held in December last year, optimism ran high among the Chinese economists who projected around 6 percent growth rate for this year.[ii] Although International Monetary Fund (IMF) had downgraded China’s 2020 growth rate projections to 5.8 percent,[iii] the CEWC claimed that the Chinese economy has begun to stabilise since September last year with improved economic performance across several sectors. These expectations however came crashing following the large-scale socio-economic disruptions caused by the Coronavirus (COVID-19) outbreak, first identified in Wuhan city of central China’s Hubei Province.
(Source: Xinhua, March 10, 2020)
While the Chinese government claims victory in its fight with the pandemic, the economic uncertainty seems to be mounting. Measures taken by the Chinese leadership to contain and control the spread of the virus through unprecedented quarantine, shutting down of businesses and factories, travel bans and social distancing have hit the Chinese economy in a big way. It has not only slowed domestic production in China, but has also brought its overseas activities and outbound investments almost to a standstill. According to the National Bureau of Statistics, China’s value-added industrial output fell by whopping13.5 percent in the first two months of 2020, and manufacturing industry plunged to an all-time low by 15.7 percent in February.[iv] The output from the State-Owned Enterprises (SOEs) and overseas-funded enterprises went down by 7.9 percent and 21.4 percent, respectively. Also, there has been a rapid drop in employment index with urban unemployment surging to 6.2 percent at the end of February.[v]
Although the Chinese state has lifted the shutdown and called for resuming production and business activities, the fear of contagion continues to withhold economic recovery. Despite restoration of transportation, the labour force remains trapped in villages. The migrant workers are facing difficulties to return to their workplaces, due to the checkpoints put in place by the local governments requiring them to show certificates of clearances from their employees.[vi] As a result, 80 percent of the small businesses who cannot issue the certificates remain closed due to lack of labour force. Also these companies lack enough protective gears for their employees that have been made mandatory as part of the virus prevention requirements.[vii]After the laxity displayed by the Wuhan local authorities due to which the virus remained undetected in the beginning, thereby infecting many, the local government officials in other regions have now become alert in ensuring checks to prevent any export of risks through free movement of people.[viii]
As the rapidly spreading virus affects economies after another, the China faces a slump in both demand and supply of its goods. With shops shut and businesses stalled in Europe, United States (US) and other parts of the world, the demand for Chinese exports have declined sharply.[ix] Likewise, exports from the ASEAN countries too are badly hit due to contraction of demand in the Chinese markets. The Chinese government’s travel ban and other outdoor activities have affected consumption, business activities and led to led to cut down in imports.[x] Besides, the impact of quarantine measures taken by the governments in many countries have been felt in the supply networks too. The global value chains stand disrupted due to supply shortages of raw materials, components and major sub-systems from China.[xi] In fact, the slowdown in Chinese economy has sent shock waves to the regional and global supply networks, triggering the possibility of huge financial losses. According to several estimates, the pandemic will worsen the debt situations in both developed and developing economies, evident in decrease in consumption and investment trends.[xii] For instance, given the huge levels of debt in Chinese businesses, particularly small and medium sized enterprises (SMEs), they face high risks of bankruptcy in the face of languishing commercial activities.
“The economics of contagion and of fear” also significantly affects China’s overseas investments and regional infrastructure projects.[xiii] The negative impact on growth caused by the containment efforts has redirected China’s focus “inwards” at least for the time being.[xiv] The current priority is to normalise domestic economic activities and to stabilise the financial situation. This is prompting delays and disruptions of the ongoing projects and in turn casting a long shadow of uncertainty on China’s Belt and Road Initiative (BRI).[xv] The travel restrictions as part of quarantine measures imposed by the host countries are preventing Chinese workforce from reaching the project sites and to resume work. Also, Chinese workers residing in these countries are being stigmatised as the carriers of coronavirus by the locals. Despite assurances by the Chinese President Xi about zero new cases of COVID-19 in mainland China, host countries remain extremely wary of future outbreaks.[xvi] In Malaysia, for example, the Chinese workers hailing from Wuhan are not allowed to return to the East Coast Railway Link project even after obtaining clearances from the Chinese health officials.[xvii]
To counter the negative impacts of the outbreak, the Chinese government has announced certain interim measures. These include 100 billion yuan worth liquidity into the financial system, lower lending rates for businesses, issue of cheap loans to firms, specific tax waivers for residents from the Hubei province as well as special policies to prevent layoffs.[xviii] This time the Chinese leadership has refrained from pumping in massive fiscal stimulus into the economy as done during the 2008 financial crisis. Instead, the central bank has injected some liquidity into the financial system to shore up investor confidence and to prevent the Chinese companies from going bankrupt.[xix] Economists, however, argue that fiscal and monetary policies may not work in the long term for the fact that COVID-19 affects both the demand and supply side networks.[xx] On the contrary, the tricky trade-offs arising from these policy measures are likely to burden the financial system further.
In sum, the COVID-19 outbreak poses a unique challenge for the Chinese policy makers. While the Chinese leadership takes pride in its extraordinary measures to control and contain the pandemic, the economic fallout has been unprecedented for Beijing. Besides the short term management of the crisis, Beijing is yet to outline a coherent economic strategy that prioritises public health while boosting consumption and domestic demand. Also, it remains to be seen whether Beijing has drawn the obvious lesson from the pandemic, that flow of information from the below is crucial for an early detection of crisis, of any kind.
*Dr. Priyanka Pandit, Research Fellow, Indian Council of World Affairs.
Disclaimer: The views expressed are that of the Researcher and not of the Council.
[i] (2020), “China's economy to rebound in first half of 2020: J.P. Morgan economist”, Xinhua, December 9, URL: http://www.xinhuanet.com/english/2019-12/09/c_138617547.htm (accessed on 15 January 2020).
[ii] Soung, H (2019), “In Year-End Economic Confab, Beijing Will Look to Reorder Priorities”, Macro Polo, December 11, URL: https://macropolo.org/china-central-economic-work-conference-2020/ (accessed on 12 December 2020).
[iii] Johnson, K (2019), “The Global Economy 2020: A Positive Outlook Shadowed by China, Debt, and Trade Tensions”, Foreign Policy, URL: https://foreignpolicy.com/2019/12/31/global-economy-2020-outlook-positive-china-debt-trade-growth/ (accessed on 05 January 2020).
[iv] (2020), “China's industrial output falls as virus hurts activities”, Xinhua, March 16, URL: http://www.xinhuanet.com/english/2020-03/16/c_138882789.htm (accessed on 28 March 2020); Weinland, D & Liu, X (2020), “Chinese economy suffers record blow from coronavirus”, Financial Times, March 16, URL: https://www.ft.com/content/318ae26c-6733-11ea-800d-da70cff6e4d3 (accessed on 28 March 2020);
[v] Mullen, A & Wang, O (2020), “Coronavirus: China’s factory activity plunges to all-time low, worse than global financial crisis, February data show”, South China Morning Post,February 29, URL: https://www.scmp.com/economy/china-economy/article/3052985/coronavirus-chinas-factories-activity-plunges-all-time-low (accessed on 01 March 2020).
[vi] Yu, S (2020), “China’s stranded workers drag down coronavirus-stricken economy”, Financial Times, March 4, URL: https://www.ft.com/content/43d05790-5d10-11ea-b0ab-339c2307bcd4(accessed on 28 March 2020).
[viii] (2020), “How China's old habits kept the world in the dark even as killer epidemic grew”, The Economic Times, February 3,URL: https://economictimes.indiatimes.com/news/international/world-news/how-chinas-old-habits-kept-the-world-in-the-dark-even-as-killer-epidemic-grew/articleshow/73864203.cms?from=mdr (accessed on 01 March 2020).
[ix] Weinland, D & Liu, X (2020), “Chinese economy suffers record blow from coronavirus”, Financial Times, March 16, URL:https://www.ft.com/content/318ae26c-6733-11ea-800d-da70cff6e4d3 (accessed on 28 March 2020).
[x] Roach, Stephen, S (2020), “When China Sneezes”, Project Syndicate, URL: https://www.project-syndicate.org/commentary/china-coronavirus-shock-prospects-for-global-recession-by-stephen-s-roach-2020-02 (accessed on 20 March 2020).
[xi] Betti, F & Ni, J (2020), “How China can rebuild global supply chain resilience after COVID-19”, World Economic Forum, URL: https://www.weforum.org/agenda/2020/03/coronavirus-and-global-supply-chains/ (accessed on 28 March 2020).
[xii] Ghosh, Jayati (2020), “The COVID-19 Debt Deluge”, Project Syndicate, URL: https://www.project-syndicate.org/commentary/coronavirus-debt-crisis-by-jayati-ghosh-2020-03?a_la=english&a_d=5e6f43f7daa89412a008d424&a_m=&a_a=click&a_s=&a_p=%2Ftopic%2Fthe-covid-19-crisis&a_li=coronavirus-debt-crisis-by-jayati-ghosh-2020-03&a_pa=topic-commentaries&a_ps=&a_ms=&a_r= (accessed on 28 March 2020); Rajan, Raghuram G. (2020), “The Pandemic Stress Test”, Project Syndicate, URL: https://www.project-syndicate.org/commentary/covid19-economic-weaknesses-by-raghuram-rajan-2020-03?a_la=english&a_d=5e6b98c139cf2352ac701109&a_m=&a_a=click&a_s=&a_p=%2Ftopic%2Fthe-covid-19-crisis&a_li=covid19-economic-weaknesses-by-raghuram-rajan-2020-03&a_pa=topic-commentaries&a_ps=&a_ms=&a_r= (accessed on 28 March 2020); Rogoff, Kenneth (2020), “That 1970s Feeling”, Project Syndicate, URL: https://www.project-syndicate.org/commentary/next-global-recession-hits-the-supply-side-by-kenneth-rogoff-2020-03 (accessed on 28 March 2020).
[xiii] El-Erian, M.L (2020), “The Race Between Economics and COVID-19”, Project Syndicate, March 26, URL: https://www.project-syndicate.org/commentary/covid19-will-change-economics-three-ways-by-mohamed-a-el-erian-2020-03 (accessed on 28 March 2020).
[xiv] Chan Kung and Wei Hongxu (2020), “Will COVID-19 Halt China’s ‘Going out’ Economic Strategy?”, The Diplomat, March 14, URL: https://thediplomat.com/2020/03/will-covid-19-halt-chinas-going-out-economic-strategy/
[xv] “China’s belt and road plan is getting lashed by coronavirus”, The Economic Times, March 6, URL:https://economictimes.indiatimes.com/news/international/business/chinas-belt-and-road-plan-is-getting-lashed-by-coronavirus/articleshow/74499725.cms?from=mdr(accessed on 28 March 2020).
[xvi] (2020), “China Reports Zero Rise In Domestic Coronavirus Cases”, NDTV, March 23, URL: https://www.ndtv.com/world-news/china-reports-zero-rise-in-domestic-coronavirus-cases-2199060 (accessed on 28 March 2020)
[xviii] He, Laura (2020), “Coronavirus devastates China's economy and the 'nightmare' is not over”, CNN Business, March 16, URL: https://edition.cnn.com/2020/03/16/economy/china-economy-coronavirus/index.html (accessed on 21 March 2020); Reuters (2020), “China takes major steps to prop up coronavirus-hit economy”, February 20, URL: https://www.reuters.com/article/us-china-health-policy-factbox/china-takes-major-steps-to-prop-up-coronavirus-hit-economy-idUSKBN20E101 (accessed on 21 March 2020).
[xx] Basu, Kaushik (2020), “Epidemics and Economic Policy”, Project Syndicate, URL: https://www.project-syndicate.org/commentary/covid19-coronavirus-economic-policy-response-by-kaushik-basu-2020-03 (accessed on 28 March 2020); El-Erian, M.L (2020), “The Race Between Economics and COVID-19”, Project Syndicate, March 26, URL: https://www.project-syndicate.org/commentary/covid19-will-change-economics-three-ways-by-mohamed-a-el-erian-2020-03 (accessed on 28 March 2020); Roach, Stephen, S (2020), “When China Sneezes”, Project Syndicate, URL: https://www.project-syndicate.org/commentary/china-coronavirus-shock-prospects-for-global-recession-by-stephen-s-roach-2020-02 (accessed on 20 March 2020).