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  • Testing Times for China’s Resilient Economy

    Dr. Reena Marwah
    ३०८ पटक

    Given the number of rising casualties of the coronavirus or 2019-nCoV, especially in the Hubei province of China, global economists and experts have almost halved China’s economic growth rate for the first half of 2020; however, there is room for cautious optimism.

    Writer

    It must be noted that China is a USD 15 trillion economy and this feat of becoming the world’s second-largest economy has been achieved not over a few months, but over a consistent period of high growth for almost four decades. Remarkable rates of growth in its manufacturing sector have ensured that China has emerged as the factory of the world. The credit for its unprecedented rise must be attributed to its unique style of governance as well as the visionary leadership.

    The inculcation of the spirit of enterprise backed by research and development has resulted in China’s accounting for 21 % of patents filed in 2018, (being similar to that of the USA). Hence, it is a country which is a global leader in advanced technologies. As a country that has been a world leader in manufactures, it is now in the league of creating and developing world-class industries in everything from 5G and artificial intelligence to biotechnology and quantum computing. In fact, some experts even believe that China could unseat the United States as the world’s leading technological force. With the vision of Made in China 2025, China is fast moving into futuristic industries and could well surpass the size of the US economy in a decade.

    Here it is pertinent to note the 2019 data that emerged from China. Despite the global economy slowing down in 2019, profits of China’s major high-tech manufacturing companies rose 7.5 percent year on year from January to October 2019, according to the data from the National Bureau of Statistics (NBS), China. In addition, equipment manufacturing and strategic emerging sectors also saw their profit growths accelerate during the 10-month period. Private and small industrial companies in China also reported stable profit growth during the period, up 5.3 percent and 8.8 percent, respectively. Ali Baba, the e-commerce giant reported a 38% year-on-year increase in revenue to 161.5 billion yuan ($23.2 billion) in the quarter ended December 31, 2019.

    Hence, given the gigantic economic size of China, is it possible that the temporary closure of factories due to the coronavirus in some areas would stall China’s progress? Undoubtedly, the impact will be a temporary one, though the economy, which contributes 30 % to global growth, besides being well integrated with the rest of the world, will take a few months to completely recover. It is expected that by the last week of February 2020, most factories in China would return to a minimum of 80 percent capacity. According to Dezan Shira & Associates, factories located in the city of Wuhan have been hit the hardest, though factories in Hubei and its vicinity are also adversely impacted.

    What are the responses of the investors? Given that the Shanghai stock exchange has also been volatile since the outbreak of the virus, investors are looking at gold and bitcoins as safe havens. In fact, the cryptocurrency has risen about 30 % in about six weeks of the calendar year, coinciding with the reporting of fatalities of Covid-19.

    A time for facts, not fear!

    Even as fears from the spread of the virus mount, negative growth projections also proliferate!

    Without a doubt, China’s burgeoning economy is in the interest of the global economy! Given that the world is much more interdependent today than it was when China was similarly impacted by SARS in 2002-03, it is evident that the countries more economically aligned to China are encountering challenges – from the shortage of essential imports to declining tourism incomes from the Chinese travelers and beyond. For Southeast Asian countries, Japan, South Korea, and India the impact is already perceptible. In terms of impact to tourism in the first quarter, due to fewer Chinese travelers, Japan could be hurt the most by losses worth $1.29 billion in tourism revenue, followed by Thailand at $1.15 billion. In India, construction, auto, chemicals, and pharma sectors are expected to be the worst affected.

    Within the country, China has pumped billions of dollars into its financial system, raised expectations of an interest-rate cut and vowed to reduce red tape in a package of emergency responses to the economic downturn. But there is nothing typical about China’s coronavirus challenge, which some economists believe defies traditional prescriptions for dealing with an economic shock of this nature, where millions of workers are under quarantine and factories have been shut for weeks. None of the measures announced so far, they say, can offset the abrupt drop in consumer spending and disrupted business activity in China. The adverse impacts on consumption, income, investment and trade will be starkly visible, at least in the short term.

    However, to be fair to the Chinese economy, it is imperative to avoid the pitfalls of exacerbating pessimistic views as given above and estimations as those made by Dun and Bradstreet (D&B), which stated that if the virus is not contained by the summer of 2020, 3 % of China’s 6.1 % growth rate may be lost, which would affect global growth by almost 1 %. This estimate appears to be overstretched, given that several other estimations by banks and research houses continue to maintain that the Chinese economy would grow between 5.4 % to5.8 %; notable among these are ANZ, Citi group, Economist Intelligence Unit, UBS and Macquarie.

    Here, it is also important to underline that Vanguard has maintained the growth rate for China at 5.8%. In the words of Qian Wang, Vanguard’s Asia Pacific chief economist, “the main impact on China’s economic growth is likely to be that on sentiment, and further adds that, “The good news is that the Chinese government has taken serious actions quickly,” It is hence expected that the Chinese economy will soon rebound due to the anticipated government stimulus. In fact, Chinese authorities have approved a comprehensive strategy for trying to bring the coronavirus outbreak under control. This includes not only restarting economic production wherever possible but also major construction projects to begin across the country as soon as possible. State-owned enterprises have been advised to reduce rents, while banks have been ordered to keep interest rates low.

    It is for this reason that the managing director of the International Monetary Fund, Kristalina Georgieva, advised caution while making forecasts on the loss of global growth. In her words, “There may be a cut that we are still hoping would be in the 0.1 to 0.2 percentage space,” While advising experts to not jump to any conclusions, she expressed hope that a sharp and rapid economic rebound could follow.

    Needed: A global coordinated approach

    It is well known that the Chinese leadership has built hospitals, put in place all emergency response mechanisms at the Central as well as local levels, and has ensured some transparency of the number of people afflicted by the virus and the quarantine measures. Hence, it is not without reason that the World Health Organisation has also commended the efforts of the Chinese authorities to control the spread of the virus.

    The WHO chief, Mr. Tedros also called for using the window of opportunity provided by China’s quick action to intensify preparedness, as well as for pushing back against the ‘infodemic’, as fake news spreads faster and more easily than this virus, he said. His advice needs to be heeded- that for a coherent and coordinated global approach to tackle the virus.

    In conclusion, we can draw from the experiences of somewhat similar disruptions in the last two decades as 9/11 terrorist attacks in the USA, or the 2011 floods in Thailand, which affected almost 14 million people. In USA, GDP growth dipped to 0% in 2001, despite measures to stimulate consumption and investment. The impact of the floods in Thailand was in terms of the wariness of foreign investors – especially the Japanese, from concentrating production facilities in Thailand, given that their supply chain could be disrupted. Both countries responded with economic stimuli to bring their economies back on rails.

    Considering China’s impact and integration with the world economy, it is evident that China will not be off-limits to future investment. While the challenge of Covid -19 must be surmounted collectively by nations, China must restore, at the earliest, the loss of confidence for consumers, businesses, investors, and tourists. In addition, China will need to build-in adequate financial incentives into the economy to balance commercial and obvious risks. In the long term, China must take all necessary steps to reassure its global partners in trade and investment. Ultimately, it’s rebound is inevitable and that’s what the global economy needs!

    Dr. Reena Marwah is an Associate Professor, Jesus and Mary College, Delhi University and former Senior fellow,
    Indian Council for Social Science Research, Ministry of Human Resource Development, Govt. of India.
    Founding Editor, Millennial Asia- A Sage Publication ( A biannual journal of Asian studies)

     

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