China’s Economic Recovery Far From Certain Amid Global Recession Fears

The Chinese economy is a beast that’s not easily tamed. Through the most tumultuous of times  bloodshed at Tiananmen Square, the global financial crisis, Trump’s trade war  it has continued to grow. But now, in the face of Covid-19, it seems the world’s second largest economy has met its match. 

China’s Economic Outlook is Gloomy

Figures published this week paint a bleak picture. As the virus tore through China in early 2020, every sector went into decline. The result, analysts believe, could be the first contraction of the Chinese economy since the death of Mao Zedong in 1976.   

In January and February, retail sales plunged 20.5%, industrial output was down 13.5%, and investment dropped by nearly a quarter. A fall was expected in each of the categories, but the extent of the damage has shocked experts. 

“There is nothing in the history of this data to compare to this set of abysmal figures,” said Iris Pang, a Hong Kong-based economist at ING.

Economic Calamity as a Result of Beijing’s Draconian Containment Methods

The current economic calamity is a consequence of Beijing’s draconian approach to containment. As the virus spread, officials moved aggressively to lock down China. Whole cities were cut off, businesses shut, and the movement of people and goods prohibited.    

It was a painful process, but one necessary to stem the spread. Now, as the number of new infections starts to tail off, efforts to reboot the economy are underway. 

The government is vigorously encouraging companies to return to work. Almost 95% of large businesses outside the disease’s epicenter in Hubei province have reopened, with around 60% of small to medium-sized outfits up and running again. But with millions of migrant workers still under quarantine or trapped in their hometowns, many factories and manufacturing centers lie dormant.  

A gradual easing of social isolation measures should correct this, ministers say, but more direct financial stimulus is needed. To this end, Beijing has announced a raft of new policy measures: interest rate cuts, liquidity injections, and a relaxation of taxes.

Halting the Chinese Economy Was Hard, Restarting it Will Be Harder

Beyond restoring domestic economic stability, the Chinese government has a clear incentive to get on the right footing. While the world succumbs to Covid-19, China  having survived the worst of the virus  is in a strong position to take advantage of foreign frailties and surge to a dominant position.

A recent report by Horizon Advisory, a consultancy that tracks Chinese government and economic activity, suggests that Beijing is preparing to seek out more foreign direct investment, seize market share in critical industries, and flood the market with Chinese-made goods while the West is in lock-down.    

The pandemic’s global nature may prove a poisoned chalice for China, however. With more cases of Covid-19 now reported outside of the country, international demand for Chinese products is going to plummet. As sales drop, supply chains linking China’s industrial centers to the world will fragment. Already there is evidence of multinational companies acting to reduce their reliance on the country, shifting manufacturing bases and sourcing new suppliers in different locations.       

Imports, too, will be affected. Chinese factories are dependent on fuel, iron and other key components from all over the world: Angola, Sierra Leone, Chile, Brazil and Australia. Chinese consumers also have a taste for American coffee chains and fast food, and love to drive German cars. If these markets dry up, experts say a global recession is in the offing. 

And there’s more bad news: the economic data for March could be significantly worse than that of January and February, analysts warn. Unemployment rates are soaring too: as many as 5 million people have become jobless since late last year  and consumer confidence remains at rock bottom.

Halting the Chinese economy was hard; restarting it will be harder. That’s bad news for all of us.