Chusu He would like to thank Professor Alistair Milne
of Loughborough University and the freelance journalist Elena Berton,
both of whom provided input for the article.
The Conversation is funded by the National Research Foundation,
eight universities, including the Cape Peninsula University of
Technology, Rhodes University, Stellenbosch University and the
Universities of Cape Town, Johannesburg, Kwa-Zulu Natal, Pretoria, and
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Western Cape, the African Population and Health Research Centre and the
Nigerian Academy of Science. The Bill & Melinda Gates Foundation is a
Strategic Partner. more
Many Chinese factories remain restricted or closed.
EPA
Investors are still being fairly complacent about the novel
coronavirus. After the number of new daily cases suddenly shot up to
more than 15,000 on February 12 following more than a week of decline,
there were some jitters in the markets. With Chinese authorities saying the increase was due to a decision to broaden the definition for diagnosing people, there were falls in the region of 1% in European markets, and smaller retrenchments in Asia and North America.
It is a fairly minor shift in sentiment after a few days in which investor concerns had been
steadily receding. There appears to be a real danger of underestimating
the likely economic impact of this crisis. China’s manufacturing sector
in particular faces an unprecedented challenge because supply chains
have been so seriously disrupted. Coronavirus daily new cases
WorldometersWell over
80 cities have gone into lockdown, including the entire areas of five
Chinese provinces – Hubei, Liaoning, Jiangxi, An’hui and Inner Mongolia –
and four main cities in Zhejiang province, affecting well over 275
million people. Since February 10, Beijing and Shanghai have further
restricted the movement of people, having already extended the Chinese
New Year break.
My parents live in Jiangxi province and are among millions
semi-quarantined at home. The local government allows one person from
each household to go out every two day to buy necessities. Even in
cities not under compulsory lockdown, there are rarely people on the
streets. The tweet below shows the Nanjing Road in Shanghai, the busiest
shopping precinct in the country. It was taken on January 26 but the
situation is not much better now.
This is taking a serious toll on the Chinese economy. No statistics
on the actual losses are available yet, but for example, the number of
intercity passengers on public transport during the new year break was only 60% of 2019 levels.
Xibei, a famous dining brand with 350 restaurants and RMB5.7 billion (£628 million) annual revenues, said takings
during the holiday period were down 87% year on year. The contrast with
last year, when Chinese tourism, retail and catering revenues all rose by around 8% during the new year period, is likely to be huge.
The problems in the Chinese services sector are primarily a demand
shock. This will probably rebound once the epidemic is contained, just like during the Sars outbreak of 2003. The Chinese inflation rate based on the consumer price index (CPI) turned down during peak crisis between February and June 2003, then quickly shifted to positive.
Makers not marching
This time around in manufacturing, which comprises
nearly a third of the Chinese economy, there is a much bigger shock to
the supply side than in 2003. Factory lines have ground to a halt
because of the lockdown. You can see the gap between the demand and
supply of Chinese goods by comparing the inflation rate with the level
of optimism among the country’s manufacturers, as measured by the
purchasing managers’ index (PMI).
The Chinese CPI in January rose 5.4%, the highest monthly rate since October 2011, while the manufacturing PMI hit a three-month low
of 50%. The fact that inflation is actually rising this time when it
fell in 2003 is because this time, both supply and demand are falling
but supply is falling faster.
To keep the economy afloat, the government has rolled out
a series of financial measures, including lower borrowing rates, loan
extensions, tax reductions and waivers, and an injection of RMB200
billion (£22 billion) in market liquidity. This will ease financial
strains, but not address the underlying problems in manufacturing supply
chains.
Many manufacturers cannot resume
work because they can’t get supplies of raw materials and their
workforce is quarantined. They are having problems with orders, wage
payments, cash flow, order deliveries, debt repayments, and logistics
and transport. Many are also facing penalties for breaching contracts.
Many companies are also having to suspend operations by order of the
local government. For example, out of 29,814 firms that have applied to
resume operations in Hangzhou, the capital city of Zhejiang province,
just 162 had been given authorisation by February 10.
Many smaller companies can’t get authorisation because they are less
capable of sourcing face masks than bigger companies. They are also more
wary of letting out-of-town workers return because they usually have
less dormitory space so can’t give them a room to themselves – another
key precaution against the spread of infection. A poll
of 1,295 firms by the Chinese Academy of Social Science (CASS)
published on February 1 found that 43.9% expected their business will
post a loss in the coming year. It won’t take long before liquidity
problems morph into solvency problems, especially for smaller companies.
Only 9% of respondents to the CASS survey
thought they would survive a month of suspended operations, while
two-thirds said that a two-week shutdown was all they could take.
Global supply chains
This is already disrupting the world supply chain for manufacturing, hitting everyone from big South Korean car manufacturers like Hyundai and Kia to small tech companies in the US like Agilian Technology.
Hyundai factory in Ulsan, South Korea, closed due to supply problems.EPA
Some Chinese manufacturers, such as number-one Apple supplier Foxconn, are resuming work
in phases, but they still need more time to reach full capacity because
only local employees can return immediately. Workers travelling from
elsewhere have to isolate themselves at home for seven to 14 days before
returning. The next Apple smartphone, due in March, could be delayed.
The new coronavirus is a major shock to all market participants in
China. Even if the outbreak is contained over the next few weeks, it
will still have a long-term impact. The demand and supply shocks could
combine to drive China into stagflation,
where there is inflation and weak economic growth at the same time, and
for which there are no effective monetary or fiscal policies.
The uncertainty created by the outbreak, compounded by China’s trade
war with the US, is going to force companies to re-examine their
exposure to Chinese manufacturing and the whole idea of a global supply
chain. It wouldn’t be surprising to see rival countries developing
supply hubs of closely linked manufacturers of the kind that China has
created very successfully. This, too, looks like bad news for China. The
novel coronavirus is prompting a new period of global instability whose
ramifications could be felt for many years to come.
