• Legacy Writer

How has the Chinese Economy been Affected by the COVID-19 Pandemic?

Following almost three months of nationwide quarantine against the COVID-19 outbreak since mid-January, Wuhan, the Chinese city where the first case was discovered, finally ended its 76-day lockdown on the 8th of April. Reported by the WHO, the percentage change in newly confirmed cases in China has been kept lower than 1 per cent since the 23rd of February. However, whether the economy recovers in the aftermath of coronavirus is still questionable. This article will discuss the repercussions of the COVID-19 on the Chinese economy with regards to the global supply chain, domestic consumption as well as business activities.

As the leading supplier of manufacturing goods, China’s health-oriented policies including lockdowns, quarantines and travel bans have resulted in a slowdown of global supply chains. With the exception of production lines for health essentials, all other manufacturing industries have faced a shortage of factory workers in maintaining regular supply for exports. Additionally, under the condition of lower demand and lower freight rates, logistics has been affected significantly. Reports have published that Very Large Containership Vessels (VLCVs) were leaving Chinese ports with capacity filled to just 10 per cent. Major ports for shipment and air routes were closed, which renders freight exports even less possible. As a result, China has encountered its first trade deficit since March 2018 – a deficit of USD -7.09 billion in the first two months of 2020. This deficit mainly stems from the exports sector – Chinese exports have plunged 17.2 per cent in February 2020 compared to the previous year, while imports have only shrunk by 4 per cent, with an expected decline of 15 per cent.

With regards to COVID-19’s demand-side impact, an expected negative multiplier effect appears to not be entirely applicable in the case of China. The Asian Development Bank has identified a chilling effect on domestic consumption and investment in most Asian countries affected by the coronavirus. If one follows the logic of negative multiplier effect, the shrinking demand will result in lower income earned by households, hence further inducing lower level of consumption and investment. This is true for investment, as the growth rate of investment in private fixed assets declined from 4.7 in December 2019 to -26.4 in February 2020. However, retail sales in China initially fell by 9.36 per cent in January 2020 but quickly improved to -4.52 per cent of change one month after. This moderated situation could be attributed to a high average saving rate for Chinese households, which upheld their consumption for essentials even without a stable income in these months.

Nevertheless, businesses were indeed hurt immensely. Urban unemployment rate skyrocketed to 6.2 per cent in February for both cyclical and structural reasons. Businesses were sacrificed once the national priority turned to the battle with COVID-19. Many businesses had to choose either to cut costs or face bankruptcy. However, firms with unhealthy capital turnover, which had hoped to capitalise during the spring festival, faced a worse situation of shrinking consumption and investment. Companies with jobs that could not be undertaken online, such as physical goods production and tourism were hit most harshly. On a brighter note, the China General Manufacturing Purchasing Managers’ Index (PMI) by Caixin indicated a recovery of business activities in the first two months. After slumping to 40.3 in February 2020, the lowest record in 10 years, the PMI quickly jumped back to 50.1 in March, exhibiting a “broad stabilisation” of businesses conditions.

Overall, in the aftermath of COVID-19, while the Chinese economy was significantly affected in the initial two months, several signs indicate that it has been gradually recovering as the coronavirus situation in China generally ameliorated.

Image Credits: Wikimedia Commons

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