Surviving COVID-19: China’s Economic Aftermath

By: Lauren Hutson

China ranks as the second-largest economy in the world and the fastest-growing trillion-dollar economy. With a staggering GDP of $14.14 trillion in 2019, it consists of 16.38% of the global economy. Thus, the widespread halt of business activity from the coronavirus epidemic has had serious implications for an economy of its size. Businesses are struggling to restart with employees still on lockdown, and consumers are hesitant to return to previous normal life outside of their homes. These factors, combined with the consequences of decreased demand from the global spread of the virus, are forcing China to take new steps to restore the country’s prior economic activity. Virtually all industries have been affected by the closures, with those hit hardest including retail, tourism, tech, automotive, and food & service.

The initial outbreak of the coronavirus and the rampant spread that followed led China to enforce over a month of city-wide lockdowns in the city of Wuhan and surrounding areas. By mid-January, over 60 million people in these areas were not able to move between cities as trains were suspended and roads were blocked. As more people contracted the virus, stay at home orders increased, forcing around 760 million people to be confined to their homes. Lockdowns in some cities are still ongoing, with Wuhan set to remain locked down until April 8th. However, the Chinese province of Hubei began allowing its 60 million residents to leave their homes and commute to other areas at the end of March. These months of widespread lockdowns have drastically slowed China’s economy, and the extremely gradual return of movement between cities makes restarting business a challenge.

Most factories in China have been allowed to reopen since the extensive closings during the Lunar New Year holiday in January. The after effects though, and struggle to return to pre-epidemic production levels, is evident. Health officials say that the outbreak will not be declared as over until there are no new reported infections daily for two weeks straight, meaning that limitations on travel and movement will still persist. Factories are only at 50 to 60 percent of capacity, and small businesses are at less than half, as more than 50 million migrant workers have not yet returned to work. Some workers remain in quarantined areas, while others live in rural regions where bus services have not resumed yet. But, even if all workers were able to come back, they may not be needed, as local business is minimal and global demand is suffering due to the spread of the coronavirus.

With many consumers still hesitant to resume normal life before the epidemic, retail sales have fallen 20.5% from a year ago. Similarly, car dealerships remain mostly empty, with car sales dropping 80% in February from the same month a year earlier. Global demand is also expected to fall with worsening epidemic conditions in other countries. Exporters surveyed by China’s Ministry of Commerce describe the difficulty of fulfilling overseas orders as many customers suspend purchases or cancel orders, along with worsening shortages in China of workers, parts, and raw materials. Tang Jianwei, an economist with Bank of Communications, comments,

“While trade data in the first two months reflected disruptions from the coronavirus epidemic, China’s exports are set to face more headwinds from the virus spreading to other parts of the world that could depress global growth and demand”

These headwinds can be seen in the numbers, as China’s exports dropped 17.2% in the January-February period compared with a year earlier, reversing the 7.6% year-over-year increase recorded in December. 

These numbers represent a concerning picture for China’s economic future. Analysts state that the Chinese economy may have shrunk in the first months of 2020; this would be China’s first economic contraction since 1976. Analysts at Goldman Sachs predict that China’s GDP could fall by 9% in the first quarter of the year compared to the same quarter a year before. This is especially unsettling, considering that China’s growth has previously survived severe events like the Tiananmen Square protests, the global financial crisis, and the trade war with the United States. In the first two months of 2020, a $7.09 billion foreign trade deficit was reported, China’s first deficit in almost two years. Furthermore, the unemployment rate jumped to 6.2% in February, a record high.

The epidemic is forcing the Chinese government to make some changes. In 2015, Xi Jinping, General Secretary of the Communist Party of China, had made it known to the public that the focus of the ruling Communist party would be on eliminating extreme poverty by the end of the year, as well as doubling economic output between 2010 and 2020. Now in 2020, many question the feasibility of this goal to double output, as economists have said that this requires China to grow its economy by at least 5.5% a year. China’s goal of quickly returning to pre-epidemic levels may be hard, as Iris Pang, of ING Bank NV in Hong Kong, says that, “as the coronavirus spreads to almost everywhere, global demand and global supply chains will take a hit and will feed back to China’s manufacturers and exporters in March and April.”

Different areas of China are adopting processes to help consumers and businesses. Beijing has focused on a state media-backed campaign to get business back to the pre-epidemic normal; bankers are urged by regulators to show leniency on debt repayments, and insurers have been told to extend policies even when premiums are paid late. Tang Jianwei, an economist with Bank of Communications, stated that Beijing will likely have to rely more on domestic demand and stimulus measures to ensure growth as more risks arise with the global spread of the virus. Similarly, Shanghai reports that it has helped residents and businesses with over $15 billion in loans and credit assistance. The People’s Bank of China has also provided banks more money to lend by reducing the minimum amount of cash that must be in reserve at the central bank. The Chinese government has put money into infrastructure projects to create jobs, has reduced taxes on small businesses, and required banks to defer loan payments for households and companies that struggle to get back on their feet. The government is also making efforts to help transport healthy migrant workers back to their jobs. 

These efforts come with hesitance, as many worry that resuming work at the same pace as before the epidemic will cause a second wave of coronavirus to break out. This could occur from two sources: the virus may not be totally eradicated in local communities, and as more people return from overseas, they may bring the virus back from other countries. The International Monetary Fund predicted in October 2019 that China will contribute more than 25% of the global growth in the next five years, meaning that China’s ability to resume production, especially in areas of exporting and manufacturing, is critical for the world economy. The steps that have been taken so far show improvement, but China will have to continually exercise caution in their goals of returning to economic prosperity.