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Chinese Economy Needs To Prevent A Second Wave Of COVID-19 Pandemic Impact – Analysis

By Chan Kung and Wei Hongxu*

The novel coronavirus (Covid-19) pandemic has caused a major impact on the Chinese economy. This is not only reflected in the suppression of consumer demand, mainly in the consumption of services such as food & beverage and tourism, but also in large-scale production shutdowns, which have caused a significant short-term shock within the Chinese domestic market and global supply chain. The pandemic in China is gradually under control and the economy is recovering, many people were optimistic about the recovery of the Chinese economy in the second quarter. However, the impact of the rapid spread of the coronavirus pandemic outside China may form a new obstacle to Chinese economic recovery. For China, as the focus shifts to resumption of work and production more attention needs to be paid to the second wave of the pandemic. 

As the pandemic is still widespread, consumption in China and other parts of the world will be impacted and this market impact will translate to a slowdown in private consumption growth in developed markets. Some analysts mention that secondary effects of the pandemic on the world economy, that is, the spread of the pandemic outside China may have a greater impact on global demand. Even as China strives to restore disrupted production and supply chains, slowing global demand will affect demand for Chinese exports. Judging from the situation in Europe, China-EU trade has been in a “bottleneck period” in recent years, and trade protectionism has also hindered bilateral trade. If the spread of the epidemic situation cannot be stopped as soon as possible, under the superposition of both old and new ills, China-EU trade volume may experience negative growth this year.

The OECD has recently lowered its expectations for global economic growth and believes that this crisis will indeed exacerbate the worst manufacturing and economic crisis since 2008. According to the OECD, assuming that the epidemic runs at current levels, global GDP growth for 2020 will only be at 2.4%; recovery will be in the second and third quarters with the economy only returning to the 3% level predicted in November 2019 by the end of 2021. If the pandemic gets more severe, global GDP growth will slow to 1.5% in 2020. Regardless of the scope and extent of the pandemic, its impact on the economy will not be short term. The expectation that China’s economy will achieve a V-shaped rebound in a short time is too optimistic.

In addition to changes in demand, the spread of the pandemic has led many countries to implement travel and logistics restrictions. As observed by ANBOUND Consulting, many countries and regions will successively enter an ‘isolated’ state. This impact on the global industrial chain and supply chain will inevitably affect Chinese companies. During the coronavirus epidemic in China, the shutdown of the Chinese manufacturing industry interrupted the global supply chain and caused disruptions in overseas industries such as those in Japan and South Korea. If the epidemic in Europe and the Asia-Pacific region continues to spread, this kind of supply chain distress will have a significant impact on China. According to the research of China Merchants Securities, Germany, Britain, France, Italy, the Netherlands, and other countries that have been severely affected by the epidemic this time have a large export volume of chemical products, and mainly export intermediate products. If the pandemic further intensifies, it may harm China’s related industries.

The pandemic’s impact will prompt the restructuring of the global supply chain in the context of intensifying global trade tensions, which will have long-term impacts on the Chinese economy and affect foreign investment in China. Data show that at least 30-40% of foreign investors may withdraw their supply chains from China to diversify the risks, and the spread of the pandemic will accelerate this trend. Therefore, under the impact of global trade tensions and the new coronavirus pandemic, global supply chain restructuring is inevitable. The UNCTAD report states that foreign direct investment is likely to fall by 5 to 15 percent this year. More than two-thirds of the world’s top 100 multinational companies have indicated that their business has been affected by the epidemic, and many companies have even warned that capital expenditures in the affected areas will be slowed. Therefore, regardless of how long the outbreak continues the scale of foreign direct investment will be dragged down and the impact on foreign direct investment will often affect the cross-border investment of private enterprises.

The global spread of the pandemic has triggered panic in global capital markets and sharp fluctuations in global stock markets. Such fluctuations will also affect China’s capital market and financial system. Judging from the performance of the Chinese stock market, the A-share market has begun to emerge from the direct impact of the “first wave” of epidemics in February with the support of government policies. The fluctuations in the global market, as well as the drastic changes in the crude oil market brought on by the spread of the pandemic since March, are causing international financial capital to pivot towards the relatively stable Chinese market. With the gradual control of China’s epidemic, China’s capital market has become one of the few safe havens in the world. This has enabled China’s capital market to be relatively stable, granting a short-term positive effect. However, factors such as asset price deflation, weakened aggregate demand, intensified debt crisis, and worsening income distribution are still prominent anomalies in the global capital market. Under the blow of the pandemic, it may also trigger a more vicious downward spiral and even a new round of financial crisis. Once this happens, the flow of international capital will inevitably impact the A-share market and the Chinese bond market.

Since the financial crisis in 2008, the fragility of the global financial system caused by quantitative easing has not been resolved. The current coronavirus outbreak has exposed this hidden danger. At present, the recent financial hedging measures have caused a credit crunch effect and the corporate debt crisis triggered by this has begun to threaten advanced economies. China also faces the problem of excessive financial leverage. Last year’s market turmoil has led to the outbreak of regional financial risks and increased corporate debt defaults. Now, a new round of external shocks caused by the new coronavirus pandemic will put China’s financial market to the test.

Final analysis conclusion:

Currently, the outbreak in China has eased, but the pandemic outside China has spread rapidly. The direct impact of the epidemic on China is gradually easing, and the Chinese economy is gradually recovering. However, the spread of the epidemic globally will threaten the Chinese economy with a “second shock” and will have an impact on economic demand, the industrial chain, and supply chain, as well as the domestic capital market.

*Founder of Anbound Think Tank in 1993, Chan Kung is now ANBOUND Chief Researcher. Chan Kung is one of China’s renowned experts in information analysis. Most of Chan Kung‘s outstanding academic research activities are in economic information analysis, particularly in the area of public policy.

*Wei Hongxu, graduated from the School of Mathematics of Peking University with a Ph.D. in Economics from the University of Birmingham, UK in 2010 and is a researcher at Anbound Consulting, an independent think tank with headquarters in Beijing. Established in 1993, Anbound specializes in public policy research.

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