Question

What are the effects of COVID-19 on China's Economy

before and after COVID-19 illustrate how COVID-19 affects China's economy. In addition to the whole country, you also need discuss the differences of the effects between different areas of China

At least 1700 English words are required

Answer 1

Chinese economy before covid

Since reform and opening policy in 1978, Chinese economy has been in a rapid growth. From 1978 to 2007, the average growth rate of China’s per capita GDP is 8.6% per annual, until now it has not show any signs of slowing down. From 2000 to 2007, the average growth rate is 9.2% per annual, and the growth of China GDP accounted 35% of the world (Linda, 2012). It has not seen in the past that China, as a large population country, increased so fast, and China has started to eliminate poverty situation since1978. What’s more, the transformation from planned economy to market economy is very difficult during the early reform.

The first stage of the economic reform concentrated on rural areas from 1978 to 1984. Non-farm enterprises in rural areas are allowed to establish by the government, which encourages household savings (Spencer, 2012). Enterprises began to manufacture the light industrial products which nationalized business cannot supply. The rapid production improved the efficiency of agriculture, and people who live in rural area can find more jobs.

The process of the urban economic reform is the following stage from 1985 to 1992, especially for the national business, it has been gradually granted greater operational autonomy (Daniel &Germà, 2012). The national ownership agent restricted the efficiency of the national business, and the ownership enterprises are the beginning participants, then the competition is from the domestic and foreign private enterprise.

The third stage of the economic reform is from 1993, which is primed by Deng Xiaoping’s speech and the aim is to support more radical reform. The reform of administrative supervision canceled a variety of constraints on economic growth, which contained rural-urban migration, the banking system, tax system, international trade and foreign investment.

In a word, the reform built the market mechanism and incentives, which were lacked in the socialist planned economy. The Government absorbed the wealth of resources and labor into the ever-expanding, more productive activities, and also promoted economic growth. It is believed that the combination of these factors have made China’s economy in a high growth rate.

Factors that made China to Become “Rapidly Developing Economy”
Social-economic structure
Social-economic structure refers to the state of mutual adaptability, quantities proportion and arrangement relevance when diverse economic sectors, industrial sectors and various aspects of social reproduction in national economy start forming one system. The social-economic structure mainly includes industrial structure, distribution structure, exchange structure, consumption structure and technical structure. Among them, the most important one is industrial structure.

The growth rate is not a problem, but the key point is that economic development should be sustainable and inclusive. Chinese government insists the new path of industrialization with Chinese own characteristics. The government also insists to expand domestic demand, especially the consumer demand, for promoting the economic growth which is depending on the investment and export. The transforming from the scientific and technological progress, the quality of workers, management innovation will promote China’s economic growth. Under the guidance of this strategic approach, Chinese economy is promoted in a large degree.

Chinese government promulgated a series of major economic policies, such as energy saving, industrial adjustment and revitalization plan, technological innovation, the regional economic development plan, outdated elimination and excess capacity. All these policies have promoted Chinese economy to grow fast. There is an important point of economic structural adjustment that the economic growth promotion is transforming from investment and exports to the consumption, investment and exports. Due to the strong domestic demand growth, Chinese economy coped with international financial crisis and external demand pressure. It is effective to achieve the stable and rapid economic development. Exports, domestic demand and investment grow fast and go hand in hand. However, they are the basic demand for the long-term sustainable scientific development of the Chinese economy .The last concern is to promote the urbanization actively and steadily. Chinese economic development potential depends on the economic structural adjustment and domestic demand expanding.

Economic Development Level
The improvement of Chinese GDP and national income has stimulated the domestic demand, which also promote the development of tourist industry. At the same time, Farmer-friendly policy promotes more Chinese people to go out of China. Thus, farmer-friendly policy stimulates the economic development of the world. In 2011, the average annual GDP growth achieved 7% and new employment people reached 450 million (Gerald & Pak & Lai-Ha, 2012). The unemployment in 2011 was controlled within 5% (Gerald & Pak & Lai-Ha, 2012). Price level keeps stable. International revenue and expenditure tends to be balance. Economic growth quality and efficiency have been enhanced obviously.

Economic System
The reform and opening policy of China is the most fundamental motivation for China’s rapid economic development. Three great turning points belong to this reform. Firstly, Previous planned command economy is changed to the socialist market economy system. Secondly, China has transferred from a closed and semi-closed society to the wide opened community. Thirdly, people’s living level are enhanced. The economic system of China tried to introduce a little market mechanism into the planned system, implementing the household contract responsibility system in rural areas and reforming the state-owned enterprises in the city (Sean & Sara, 2012). In the world’s economic crisis, expanding domestic demand is the fundamental principle to stimulating economic growth.

Macro-economic Policy
The two major macro-control policies of fiscal and monetary significant changes will have an important impact in the future economic, and the goal of the policy is to promote the stable and rapid economic growth. Implementing the proactive fiscal policy and then increasing the fiscal spending and government investment can stimulate the whole social investment. All of these are helpful to stimulate the economic growth.

Moderate loose monetary policy aims to achieve the purpose of stimulating economic growth by adjusting the money supply, interest rates and credit management. At the same time, the adjustment of the money as cut interest rate and the deposit reserve ratio relax the credit supply. China government pays more attention to the trends after international economic financial crises, and coordinate with other major economies to strengthen the macroeconomic policy. The proactive fiscal policy and loose monetary policy are implemented together in line with the current macroeconomic policy, which will play an important role in the future economic development.

The current economic situation
The main current economic situation of China is the downward trend economic growth rate. The growth rate of retail sales of social consumer goods and consumer confidence index are in a slow decline of foreign trade in recent months. The import and export growth remained at low levels. Shrinking external demand, economic growth important constraints, and sluggish foreign trade situation are the important constraints for the economic growth. Based on all the above, Chinese government insists on implementing proactive fiscal policy and prudent monetary policy, strengthening and improving macro-control policies, and then keeping the stable and rapid economic development. In a word, with the introduction of policy measures gradually put in place, China’s economic growth will be further stabilized, which would lay the foundation for the next round of steady and rapid development.

2.2 Political Factor
Effect of China’s national policy
In the unique social structure of China, politics always plays a leading role to economy. Economic development will inevitably require the change of the political system. Otherwise, politics cannot promote the economic development, but resistance to economic reform. To maintain political stability and unity for a long time, the core problem is to keep the political stability. Now in China, the stable politics is a basic condition for economic development and the improving legal system is a necessary condition for economic growth.

China has changed previous planned economy to market economy. Market economy has promoted a hunge change for Chinese economy. Market economy also has had a significant impact to the social structure, ideology and culture. These changes of economic, social and cultural aspects will also affect China’s political development. It is an important issue in Chinese modernization process. In addition, the development of the market economy also needs a new political environment besides the necessary policy. Stable political environment can promote and make commitment to the development of the market economy. In other words, China needs a new political environment which could adapt to the change of the market economy. The policy also should promote the coordinated economic, ideological and social development. The market economy can be guaranteed on this base. In short, all the developments need to be on the basis of stable politics.

China Trade Agreement with other countries
Chinese trade agreements with other countries optimize the structure of foreign trade and protect both profits. From the export structure, the products of labor intensive, electrical and high-tech keep a rapid increase. From the import structure, the import products for domestic construction reflect the beneficial economic. At the same time, the agreements help the economic exchanges of China coastal cities more closely and frequently.

2.3 Technological Factors
The improved technical level speeds up the upgrading of traditional industries, enterprise technology, equipment and management. In meanwhile, it can also enhance new product development as well as improve the technological content of products and value-added, and increased the upgrading of products and product quality improvement, enhance the competitiveness of companies. These are the bases for the rapidly developing economy of China. Through these efforts, Chinese traditional industries are out of the slowdown economic development in the world. It also washes out the backward productivity actively and optimizes the transformation in depth to maintain the economics of China.

After covid

The outbreak of the novel coronavirus (COVID-19) is for the time being the most significant black swan of 2020 apart from the increased tensions between the US and Iran which could adversely affect not only the Chinese but the global economy as well.

On 31 December 2019, the World Health Organization (WHO) China Country Office was informed of cases of pneumonia unknown etiology detected in Wuhan City, Hubei Province of China. The Chinese authorities identified a new type of coronavirus, which was isolated on 7 January 2020. On 30 January 2020, WHO issued a Public Health Emergency of International Concern. As of 16 February 2020, WHO reported 51,857 confirmed cases worldwide affecting 25 countries with the epicenter in the south-eastern part of mainland China with 51,174 confirmed cases (with the highest number of cases in Hubei (38839), Guangdong (1316), Zhejiang (1167) and Henan (1231)). The number of deaths reported so far amounts to 1666 in China and 3 abroad. WHO asses the risk of the global pandemic as high and with reference to China as very high. At this stage, we do not fully understand how the 2019-nCoV spreads. This makes containment efforts difficult. WHO officials state clearly that at this stage one cannot predict the direction, duration, scope and scale of the epidemic. This creates an extra dose of uncertainty.

The impact of COVID-19 outbreak on the global economy could be more severe than the impacts of the other major outbreaks in recent history e.g.: SARS (2002-2003), MERS-CoV (2012 -), A/H1N1 (2009-2010) or Ebola (2013-2016). For many reasons - the origin of the COVID-19 should be compared to SARS pandemics which originated from the Chinese Guangdong.

SARS or severe acute respiratory syndrome was a viral respiratory disease of animal origin caused by the SARS coronavirus (SARS-CoV). Between November 2002 and July 2003, an outbreak of SARS in the southern China infected in total 8,098 people (mostly in China), resulting in 774 deaths reported in 17 countries (with a fatality rate of 9.6%), with the majority of cases in mainland China (5,327) and Hong Kong (1,755). No cases of SARS have been reported worldwide since 2004. The Chinese government was criticized for mishandling the outbreak and reacting too slowly (the first case was reported on November 16, 2002, and the WHO was informed only on February 14, 2003). In the case of SARS, it took more than half of the year to contain the spread of the virus.

Considering the lessons from SARS, the Chinese government reacted fast and immediately informed the international bodies (such as the WHO). The measures introduced by China to contain the outbreak at its sources are unprecedented - the quarantine has been levied originally on the city of Wuhan (the source of the outbreak) and later extended to the whole province of Hubei (affecting more than 60 million people).

The steps taken so far could have slowed down the spread of the disease to the rest of the world. According to the WHO, a widespread community transmission has not been observed outside of China which is encouraging. The outbreak could be more severe than SARS and could be potentially more disastrous for countries with less efficient health systems.

The impact of SARS on the Chinese economy

Looking from hindsight SARS had a limited impact on the Chinese economy over the long term. However, the short-term impact (quarterly) was detectable. China was the world's 6th largest economy in 2003 experiencing high growth rates over a prolonged period. The SARS outbreak caused China's real GDP growth to slow from 10.5% year over year in the first quarter of 2003 to 8.9% in the second quarter of 2003 and then it accelerated to 10.1% in Q3 and 10.5% in the last quarter of 2003. The overall cost of SARS for China is sometimes estimated as high as 0.5 to 1 percentage points (in the counterfactual scenario).

Expansion in Chinese exports, however, remained steady throughout 2003. The global economy was coming out of a downturn in 2001 to 2002 (real GDP growth rates were 1.74% in 2001, 2.05% in 2002 and 2.88% in 2003) and this fueled demand for Chinese goods allowing the economy to smoothly recover from the outbreak. On the other hand, the y/y growth rates in Chinese imports declined significantly from January to April 2003. Overall, the contribution of trade to Chinese growth, however, remained positive.

Retail sales and industrial production in China was however adversely affected. The decrease in the industrial production growth rates was particularly evident from January to May 2003 prior to recovery.

Industrial Production

China in the global economy

In comparison to the time of the SARS pandemic, the role of China in the global economy has significantly increased. China is currently the second-largest economy of the world after the US. It is the second-largest importer of manufacturing goods (1.674 trillion USD in 2019) accounting for 9.1% of global imports and the largest exporter (2.524 trillion USD in 2019) responsible for 13.7% of global exports. It is a key country for industrial production and has a key significance for global value chains. China's role globally and in the South Asian region, in particular, is currently much greater than in 2003 and the region's economies are more interlinked.

In comparison to 2002-2003 period, the rates of growth are much more moderate with the real GDP growth rate y/y reported at 6.0% in the third quarter of 2019 and 5.8% forecasted for 2020 (this is still significantly above the world average or the growth rates for the advanced states).

Real Value

The major trade partners in Chinese's exports in 2019 included the US (19.1%), Hong Kong SAR (10.1%), Japan (6.6%), Germany (4.1%), South Korea (3.7%), Netherlands (3.75), Vietnam (3.4%), India (3.0%) and France (2.2%).

China major partners

The share of China in global exports was the highest in the case of computers, office, communications, and professional equipment (34.1%), textiles, leather, and apparel (32.8%) as well as glass and non-metallic products (23.8%). The impact could be thus asymmetrically affecting various GVC to a different extent. For instance, despite the share of China of 5.2% in the global exports of transportation equipment and parts, the outages in the production of key parts already have adversely affected production in the automobile industry globally. Some services sectors could be significantly affected including tourism and transportation (e.g. airline sector).

Hubei province

As the outbreak is mostly concentrated in the Hubei province it is worth to look at the structure of the economy of the affected province.

Hubei province in central China is located at the junction of the Yangtze River Economic Belt from east to west and the Beijing-Guangzhou Railway Economic Belt from north to south. The province is bordered by Shaanxi, Henan, Anhui, Jiangxi, Hunan, and Chongqing Municipality.

The province plays a major role as the largest transportation hub of central China with a significant industrial base and is key to the Central Region Development strategy and the development of the Yangtze River Economic Belt. Hubei's GDP ranks 8th among all provinces in China. Major industries located in the Hubei province include a mixture of traditional and hi-tech sectors such as automobiles, food processing, electronics information, equipment manufacturing, textiles, petrochemical as well as iron & steel.

The impact of COVID-19

The strict restrictions introduced by the Chinese government to control the spread of COVID-19 have so far caused a significant reduction in economic activity in particular to Wuhan and Hubei province. It is worth to note that 26 of 31 Chinese regions have announced extended work stoppage for non-essential enterprises (New Year holidays have been extended; confinement was imposed on millions of residents and travel restrictions within China have been imposed).

The impact of the coronavirus will mostly hit China's first-quarter growth. It could extend the second quarter as well if the outbreak lasts longer (till May 2020 if the SARS scenario repeats itself). The overall impact is likely to lower the Chinese real GDP growth rate in 2020 to approx. 5.4% Various economic research teams have already cut their forecasts for 2020 by 0.2 to 0.8 percentage points.

Taking the above into account, policymakers increasingly focus on work resumption in order to stabilize economic growth in 2020. The measures include increased financial support, stabilization of labor market conditions and household consumption as well as expansion in investment spending. Financial & monetary policy support measures embrace intensification of countercyclical monetary policy intervention, provision of lower borrowing costs for affected enterprises, loan rollover or extension for affected enterprises, forbidding lending withdrawal and provisions of tax postponements or tax reductions for affected companies.

The Chinese economy is likely to bounce back after the new outbreak is contained with a rise in the activity in the Q2/Q3 of 2020 due to policy measures described above and the expected increase in consumption spending (with a significant increase in retail sales).

The disturbance to industrial production could be more severe due to a drag caused by the prolonged production shutdowns. These create significant supply outages and disruptions to the internal and external logistics networks and trade flows. It is important to note that the current global manufacturing inventories are generally low. If the situation is prolonged, the adjustments to GVC will be necessary with some production shifting to countries not affected by the outbreak. The impact on global trade flows and shipments could thus be significant and last longer.

The unadjusted PMI index for Chinese manufacturing by IHS Markit readout for January 2020 is below the benchmark value of 50.0 points indicating a contraction. It is worth to note that is less severe than the readout last year.

China manufacturing PMI unadjusted

The most recent trade data are currently available for December 2019, so it is difficult to accurately predict the scale of the effect on Chinese exports and imports. The first estimates showing the scale of the actual downturn will become available only in March. The effect on the trade flows will become more evident only from March onwards (May on in the available data) due to the typical two-to-three-month lead time between purchase and delivery.

The recent webinar by the IHS Maritime& Trade team raised several important issues. The coronavirus couldn't come at a worse time for global shipping. The predicted impact is likely to be much larger than SARS. Given the scale of the economic shock, in the very short to medium-term, shipping demand globally is likely to be severely hit. The expected Chinese demand slowdown is already depressing freight rates, hitting market sentiments hard. Commodity shipping, dry bulk and oil tankers are likely to be worst impacted in the short-term. The impact on container lines could be significant as well.

China had shut down the 56 million-strong central Hubei province and its capital Wuhan for over two months since January 23 to contain the virus for over two months, the entire country came to a standstill.

China’s GDP took the worst hit since the disastrous Cultural Revolution in 1976, plummeting by 6.8 per cent in the first quarter of 2020 as the country took unprecedented measures to fight the coronavirus pandemic that brought the world’s second largest economy to a standstill.

China’s gross domestic product stood at 20.65 trillion yuan ($2.91 trillion approx) in the first quarter of 2020 amid the COVID-19 impact, down 6.8 per cent year on year, China’s National Bureau of Statistics (NBS) said.

On a slowdown mode, China’s economy grew by 6.1 per cent in 2019, the lowest annual growth rate in 29 years amid the bruising trade war with the US but it remained above the psychologically important mark of six per cent.

The GDP in 2019 expanded to $14.38 trillion from $13.1 trillion in 2018.

But the coronavirus which devastated China and the world ever since it broke out in Wuhan in December last year has dealt a major blow to the Chinese economy which was already in slowdown mode in the last few years due to steady shrinking of its exports markets.

While China had shut down the 56 million-strong central Hubei province and its capital Wuhan for over two months since January to contain the virus for over two months, the entire country came to a standstill to prevent the COVID-19 from spreading across the world’s most populous nation.

Hong Kong-based South China Morning Post reported that the 6.8 per cent drop in the first quarter of 2020 is the first contraction since the end of Cultural Revolution spearheaded by the ruling Communist Party founder Chairman Mao Zedong in 1976 which had caused extensive damage to the fledgling Chinese economy then.

Its goal was to preserve Chinese Communism by purging remnants of capitalist and traditional elements from Chinese society, and to re-impose Mao as the dominant ideology in the Community Party of China.

New data released by the NBS confirmed the slump due to the COVID-19 which was worse than predictions of minus 6.0 per cent from a survey of analysts, the Post report said.

The NBS data also showed that over the single month of March, the economy remained under huge pressure, with the industrial sectors, retail and fixed asset investment all shrinking again, following a collapse over the first two months of the year.

Releasing the figures to the media here, NBS however said the country’s economic and social development witnessed overall stability in Q1.

A breakdown of the data showed output of the service sector, which accounted for nearly 60 per cent of the total GDP, dropped by 5.2 per cent, while primary industry and the secondary industry saw a decline of 3.2 per cent and 9.6 per cent, respectively.

“The situation of epidemic control and prevention continued to improve with a basic interruption in epidemic transmission at home,” the NBS said, adding that the resumption of work and production has accelerated and fundamental industries are growing steadily, state-run Xinhua news agency reported. Data showed China’s job market improved slightly in March, with the surveyed unemployment rate in urban areas standing at 5.9 per cent, down 0.3 percentage points from the previous month, it said.

China’s retail sales of consumer goods, a major indicator of consumption growth, declined 19 per cent year on year in the first quarter of this year hit by the coronavirus outbreak, the NBS report said.

In March, retail sales of consumer goods reached 2.645 trillion yuan ($374 billion approx) down 15.8 per cent year on year.

Retail sales in rural areas dropped 17.7 per cent year on year in Q1, while that in urban areas decreased 19.1 per cent, the Xinhua report said.

The decline came as efforts to curb the spread of COVID-19 have kept most people across China indoors, as well as shops and restaurants shut during the past three months.

Revenues of the catering sector, one of the worst-hit industries, fell 44.3 per cent compared with the same period last year.

Implications

The economic impact of the outbreak will depend on its duration and severity. The effect for the global economy will obviously depend as well on its geographic scope. If it is contained to a large extent to China, it will impact the country the hardest. If it starts to spread outside, the impact could be significantly more severe affecting, in particular, the ASEAN countries (Hong Kong, Singapore, etc.) or Japan. The disturbances within global value and logistics chains could accumulate if the containment measures will have to be prolonged. The impact could be the largest on economies most linked to or dependent on China.

It is worth to note that several economies are already reporting the adverse impact of the outbreak. These include for instance Singapore (Singapore's Prime Minister Lee Hsien Loong is already referring to a potential recession) or Germany (Germany technically registered zero growth in late 2019, and the prospects for the expected turnaround in early 2020 disappear as China is one of the key export destinations and suppliers to German economy).

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