Published on: Apr 20, 2020

Effect of the COVID-19 outbreak on the Chinese economy

Industry Blogs

In a world where supply chains are globally connected, a virus outbreak such as COVID-19 could really stir up the economy. Many companies are dependent on China for the production of their products. In January, there was a fear about whether China could keep up with global demand. The general consensus was that if manufacturers could keep up their supply then the global economy would not undergo a recession.

After three months, we have to conclude that demand is also becoming an issue. Many factories have opened up after the two-month lockdown in the Hubei province. However, western companies are pulling their orders because demand has dwindled. COVID-19 is already having an immense impact on the global supply chain.

According to S&P Global Research the spread of lockdowns will have a significant impact on trade activity. The potential magnitude is shown by U.S. seaborne imports from China, which fell 59.5% year over year in the first three weeks of March, while shipments from Taiwan and Vietnam climbed 17.4% and 25.5%, respectively.

China’s overall imports and exports also dropped in March. Exports fell by 6.6 percent in US dollar terms compared to the same period a year earlier, according to data released on Tuesday by the General Administration of Customs. This followed an already large contraction of 17.2 percent in January and February combined.

China’s overall trade

Source: CNBC

In January, manufacturers wanted their production lines to reassume activity after the coronavirus outbreak shut down many industrial sectors in China. However, after some manufacturers were allowed to continue their operations they encountered a different problem. Clients from both Europe and the United States were cancelling their orders. The epicentre of the virus had officially shifted to Europe, resulting in a massive demand drop.

In Europe and the United States, Businesses and offices have been closed. The population has been confined to their homes. Economic activity has been disrupted on a scale never seen before in peacetime. Patterns of everyday lives have been altered to the occasional trip to the supermarket and working from home.

In March, the demand drop is reflected in the prices that factories charge wholesalers for their products. It has dropped 1.5 percent year-on-year last month, according to the National Bureau of Statistics. That was worse than the 0.4 per cent fall in February and the 1.1 percent contraction tipped in a Bloomberg survey of analysts.

Producer Prices

Source: National Bureau of Statistics of China

As of now, many analysts theorize that China’s economy is likely to improve after April. However, since almost 20 per cent of China’s GDP consists of export, the question is how strong this recovery will be.

The Coronavirus outbreak has come at a time where international cooperation and bilateral relations are at a low point in the last 30 years. The US-China trade war has further declined the relationship between the two countries. Especially at a time where many countries are introducing fiscal stimulus packages to stave off economic collapse, international collaboration could benefit all.

Cooperation between the US and China is vital in these times. During the financial crisis of 2008, global economic recovery was stimulated by the two countries, which supported individual stimulus measures (quantitative easing in the US and large-scale fiscal stimulus in China).

Some politicians, especially from the US argue that the COVID-19 crisis will weaken China’s global position. While it is true that some companies have begun to shift their global supply chains away from the country, this is a trend that has been happening for years now. A large amount of low-value-added manufacturing jobs have already been moved to other southeast Asian countries.

China will retain ample competitive advantages when it comes to electronics, machinery and equipment manufacturing. These advantages cannot be replaced in the short term.

The exodus of manufacturing jobs in China has not weakened its position. In the past decade, the country has focussed on shifting its economy from manufacturing to a more consumption- and service-driven model that should help sustain the country’s growth. Examples of these shifts are The Yangtze River Delta and Guangdong province. These regions used to produce garments and shoes, and assemble electronics. In the last decade, they have turned into hubs for high-tech innovation.

Funding research projects Guangdong province

Source: Datenna

The economic shift has been reflected by consumer spending as well. For the past 5 years, this has been one of the driving factors of the Chinese economy. Consumers continue to increase their spending by a considerable margin and are eager to pay for items with a strong value proposition. The overall pace at which Chinese consumption has grown is almost hard to imagine: just a decade ago, most urban Chinese only had enough money to cover basic needs like food, clothes and housing. In only 10 years time the consumer spending level has almost doubled.

Consumer spending in (RMB)

Source: Ceicdata

The increase in buying power of the average Chinese means that the country is much less dependent on foreign demand. So even if the supply chains are shifting away from the country, its domestic market guarantees China’s strong position in the world economy. Consequently, the world economy might be more dependent on China than many countries realise.

Despite China’s economic independence, the lockdown measures have still left their mark on its GDP. The measures have high costs that could result in a 10 percent decrease in GDP in the first quarter. However, the lockdown also enabled China to prevent new infections when COVID-19 was still spreading in the rest of the world. As of now, many Chinese workers have come out of lockdown and resumed their jobs. As a result, China has a head start in resuming economic activity compared to the rest of the world. 

The novel COVID-19 outbreak will leave its marks on the global economy and its supply chains. Currently, China is feeling the negative impact on its GDP. The broad image of the damage done will not be visible yet in the short term. However, the next few months will be crucial for its economic recovery and growth in the upcoming years.