Research & Analysis

COVID-19 and its disruption of the Chinese economy

The author predicts a considerable slowing down of China’s economic growth in the first quarter of 2020, which will have negative consequences for the full-year growth rate

The damaging outbreak of COVID-19 that began in the city of Wuhan—a major logistics and industrial hub—has serious economic implications for China as well as the wider region. The most significant impact is the disruption to manufacturing supply chains and the logistics sector. Consequently, China’s economic growth in the first quarter of 2020 will slow considerably, while also exerting a drag on the full-year growth rate.

Impact on the Manufacturing Sector

The Hubei province—of which Wuhan is the capital—is a powerhouse of steel, chemicals, electronics and auto parts manufacturing. It is the seventh largest contributor to China’s overall GDP. Following the outbreak, manufacturing units located in Hubei have been completely shut down, barring only a few exceptions.

The province has been on lockdown since 23 January, when the authorities froze all transportation links. The halting of several freight trains that operate from Wuhan, to both domestic and international destinations, has crippled economic activity in the region. A large number of workers who had travelled to their hometowns for Chinese New Year remain stranded because of travel restrictions, leading to a shortage of manpower.

While Hubei is the worst affected, other manufacturing hubs across the country also been operationally debilitated. Following the viral outbreak, the government extended the end of the Chinese New Year holiday period from 31 January to 10 February. But the disruptions persist, as companies are still wary of restarting production activities. While operations in financial centres like Shanghai and Beijing have resumed after 10 February, economic activity remains muted in manufacturing clusters in the hinterland. Companies in these areas fear a potential spread of the infection among the large number of employees working in close proximity.

The smartphone manufacturing sector’s supply chain is the worst affected, after already  reeling from weak global demand over the past couple of years. Almost all of the major global smartphone brands source their inputs from suppliers based in China. Production in such units has come to a grinding halt.

Foxconn, the leading supplier for Apple and the world’s largest contract electronics maker, remains shuttered. A resumption of its production activities is still unclear. According to a forecast by the International Data Corporation, China’s smartphone shipments are expected to drop by 30 per cent in the first quarter of the year. Others, like research firm Canalys, expect this fall to be even sharper. Owing to the integrated nature of electronics supply chains, the latest disruption not only affects output in China, but can also undermine the entire value chain and distribution channels across multiple countries in the region.

Logistics and Tourism: Knock-Down Impact

The outbreak has also had a negative impact on logistics and tourism. Like during the SARS outbreak, Chinese authorities have imposed severe travel restrictions, which have crippled the  transportation sector. Firms with operations in roadways, cargo, and waterways are severely hit. Although some have gradually started to restore operations, activity is well below the usual levels. According to the Ministry of Transport, as of 22 February, less than 30 per cent of the firms in the transportation sector have resumed operations, while highway traffic is at around half the normal level.

Air travel restrictions to and from China has led to widespread flight cancellations. While the impact of this will be most felt on domestic carriers, the losses to airlines from several other countries is also significant. According to the International Air Transport Association, the cost of the outbreak to airline revenue in the Asia-Pacific region is expected to be about US$ 27.8 billion. Of this, US$ 12.8 billion will be the revenue loss to China’s domestic carriers. Since fixed costs associated with labour, aircraft, and ground operations are difficult to reduce, airline companies in the region face a real risk of bankruptcy.

Tourism is also likely to take a hit across East and Southeast Asia as a consequence of the travel restrictions. A number of tourism-dependent countries in this region rely heavily on Chinese travellers for revenue generation. According to IHS Markit, Chinese tourists account for at least 30 per cent of the total foreign tourist visits to Thailand, Japan, and Vietnam. They also makes a sizeable contribution in other countries in the region, like Singapore, Australia, and Cambodia. A sharp fall in visitor arrivals, as already estimated in the case of Singapore, will have a knock-on impact on economic activity in all these countries.

Conclusion

Taken together, the impact of the viral outbreak on China’s manufacturing and services sectors will slow growth in the first quarter of 2020 significantly. According to a recent Reuters poll, economists have predicted growth during this period to slow to 4.5 per cent from the 6 per cent recorded in the previous quarter. The wider impact on the yearlong growth rate, however, is not as clear. While the full-year growth rate for 2020 is certain to be slower (pegged at 5.5 per cent by economists in the Reuters poll) than the 6.1 per cent recorded in 2019, it is largely dependent on how soon the government is able to contain the outbreak.

As such, there are no concrete signs that the crisis has bottomed out. However, some health experts suggest that the spread of COVID-19 could be reined in faster than the time taken for SARS, which took about six months. While such an optimistic scenario bodes well for an economic rebound for China later this year, it will still not be enough to allay the negative business sentiment, which could  linger for many months.

 

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