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Chinese Economy

How Will the Coronavirus Influence the Chinese Economy?

Back in December of 2019, when the Coronavirus first appeared in Wuhan, China, no one had truly anticipated the damage it would cause across the globe, from Japan to North America. At the time, it was only considered a local threat; hardly a handful of people around the world gave it any attention. After all, it was a single case in one city in central China. And yet, little did we know about how rapidly this isolated case would multiply and contaminate the rest of the planet, paralyzing continents and shutting down even the world’s biggest economies.
Governments have been adopting different approaches to dealing with the outbreak. While some resorted to complete lockdown to have a better chance of containing it, others decided to take milder routes hoping they would withstand the storm and emerge from it with the least possible physical casualties and financial losses. Although we are yet to learn which path was the wisest, it is hard to argue against either due to the sheer lack of information surrounding this new, devastating virus everyone is fighting against.

Aside from the threat to humanity, economists believe this pandemic will most likely smack down the global economy into an unprecedented and severe recession. Governments are in a state of apprehension and panic, pledging to pump trillions of dollars in a desperate attempt to salvage their economies, and hoping they can soften the blow with private-sector corporations that employ thousands of people.

To say that it is chaos would be an understatement. People need to be realistic and set the right expectations when it comes to wanting to return to “normal” pre-Corona life. In truth, it is apparent that the world will be forever changed, and a new reality will set in which we will all have to accept and adapt to, whether we want it or not. Because this ongoing crisis will naturally have serious implications for the global economic sphere, let’s have a look at how the COVID-19 outbreak will influence the Chinese economy in the upcoming months.

International Trade Will Deteriorate

China is one of the biggest and most powerful economies on the planet. This Far East country is home to over one and a half billion inhabitants, which is one of the main reasons behind the strength and scope of its economy. Combined with the numerous foreign corporations based there to benefit from the relatively low costs of labor, the country’s production power is virtually unrivaled.

As a result of the COVID-19 outbreak, however, many local and foreign factories are now forced to shut down, sending their workers home and putting their production operations on hold. With international borders also closing down, large scale exporters are no longer able to move their products as they used to. Essentially, this means that there will appear an excess of products and commodities without any buyers to purchase them. This will deeply impact the profits of Chinese companies, and threaten their ability to resume regular economic activity even after the virus is contained.

Besides, if they were somehow able to pick up where they left off, now with other countries enforcing lockdowns and effecting strict rules regarding the exchange of goods with infected countries, it might be months—if not years—before they are able to engage in international trade again.

Unemployment Rates Will Skyrocket

China started its battle against COVID-19 early on this year. Since then, thousands of companies have been reporting massive losses, especially in industries that were hit the worst. People who work in aviation, retail, hospitality, and other service industries were the first ones to experience the blow. Along with other migrant workers and individuals working menial jobs where they get paid by the day, they have felt the effects of the outbreak firsthand and were the first to lose their jobs given that employers were no longer able to pay their salaries.

The Chinese job market is under threat like never before; this still holds true today, even after the country is allegedly past the peak of the outbreak and is slowly getting back to normal life. Consumers will remain reluctant to go out shopping and dining for some time to come. Theories about being out of the danger zone can’t undermine the fact that Chinese people are still affected psychologically by the trauma that has just transpired. For its part, the government is hoping to cut down on the millions being spent in unemployment benefits by helping its people get over their apprehension and encouraging them to return to their lives outside of their homes. While this might be enough to effect change in the coming months, in the long-run, yet another underlying problem of demand shrinkage will significantly affect the Chinese labor market. With the uncertainty surrounding domestic and global economies, many large corporations will become wary about moving forward with their usual hiring patterns and will choose to keep their current staffing as is.

It is very hard to tell whether the job market will bounce back to a healthy state, and if it does, how long this will take. The situation in China today gives a glimmer of hope to other countries who are still dealing with the early phases of the outbreak. That said, the people of China do not have a reference model to turn to in their fight against the menace of unemployment.

Sizable Investments Will Be Made Towards Digital Economy

On a more positive note, this temporary economic setback can be a formidable chance to advance towards a more digitalized economy. China already has one of the most powerful digital economies in the world. As a matter of fact, most trade interactions in internal markets can be made digitally. In the past few months, the quarantine has made people further rely on connectivity and online markets.

This offers great investment opportunities for both domestic and foreign investors to improve digital infrastructures and take them to the next level. This can shift the dynamics over the next few months, while citizens are still advised to practice social and physical distancing. Workers will be able to resume work from home, and students carry on with their studies through online educational platforms. In time, as people’s faith in the economy is restored, the economy will have the chance to make a prompt and powerful comeback.

China’s Position in Global Supply Chains Will Be Affected

For decades, China has been able to preserve its status as a pivotal element in global supply chains. Multinationals relied on the cheap labor in China to further reduce their costs of production. Today, this advantage could be put into question, seeing as global supply chains are expected to go through drastic restructuring. Millions of retailers around the world source their materials from China, and with the disruption in trade caused by the spread of the virus, they are now looking into localizing a big chunk of their supply chain operations away from China.

Even though many Chinese factories are back to work for the time being, the effect of this shift will be sensed further down the road when foreign countries finalize the restructuring process. The trade war that has been going on between the United States and China over recent years is bound to speed up this process. What’s more, a growing number of retailers are even looking into ways to digitalize their supply chains, thus bypassing the hassle and expenses of both local and Chinese physical chains altogether. Nonetheless, there is a silver lining here — just because China is potentially faced with losing its current position, it can still find a new role to endorse as global supply chain markets undergo a complete makeover post-Coronavirus.

Demand for Luxury Products Will Drop

Chinese people are known for their love of luxurious high-end brands. Long queues in front of major designers’ stores are rather common in malls all over the country. This is not the scene nowadays in light of the fact that, like other businesses, luxury stores are now completely shut down. It is hard to imagine that many avid brand followers will feel forced to keep this passion in-check for the time being since the shock the economy has just experienced is affecting virtually everyone in China.

With soaring levels of unemployment and the instability of the job market, people will choose to be more mindful and will prefer spending their money on essential items. There is another interesting theory in this regard; some have argued that demand for luxury goods will be rapidly restored in China compared to other nations, with the new culture of online shopping that is expected to thrive beyond the quarantine period. Adding to that, seeing as travel bans are still effectively in place, this will cause the internal demand for luxury goods to increase even more. While both are valid and expected outcomes, they remain speculations based on projected figures and past trends. It is hard to tell which one will eventually prevail; ultimately, it all comes down to whether you are adopting a realistic or a more cautiously optimistic approach.

Local Currency Value Will Nose-Dive

The Yuan Chinese is expected to take a serious plunge before it reverts back to normal. At the beginning of the virus outbreak, investors and currency traders rushed to get rid of the Yuan and other currencies closely tied to China by fear of witnessing the collapse of the Chinese economy. This has caused the Yuan to fall in value against the US Dollar. As the country is encouraging people to gradually get back to work, after the outbreak is reportedly contained, foreign exchange markets will restore their faith in the Yuan as the global economy recovers.

Income from Tourism Will Plummet

With strict travel bans enforced all around, China, like many countries, is losing tourism-generated revenues en masse. Now that China is believed to have successfully contained the spread of the Coronavirus, authorities are even taking extreme measures to ensure that they do not get it back from traveling citizens. The Chinese government can lift this active isolation anytime. There is, however, another form of ban, seeing as it will take a long time before tourists choose Beijing or Shanghai as their next travel destination.

Although the COVID-19 outbreak had spread all over the world and been officially declared a pandemic a while ago, many nations have developed a psychological fear towards China and Asia as a whole. Many airlines have made the decision to cancel their trips to China for now without giving any indication as to when the routes will be made available again. It also remains unclear whether these trips will be brought back with the same capacity as before the pandemic. Naturally, this will endanger the Chinese tourism industry’s sustenance, and will further strain the economy with more people losing their jobs as a result.

Large Sums of Money Will Be Lost Due to Bad Debts

Following the increase in unemployment rates and loss of income in China, individuals and companies alike are unable to repay their loans. Consequently, Chinese regulating authorities are urging banks to offer special support to small businesses to encourage them to resume their business operations. Chinese banks, on the other hand, are worried that these bad debts will only multiply as a result of the ripple effects caused by the spread of the Coronavirus. This will have a negative impact on lending standards in China, opening up the door for specially-treated companies to take further advantage of this leniency. Since China is the second-largest economy in the world, slow economic growth caused by increasing bad debts can, in turn, take a serious toll on the global economy.

It is still too early to have a solid and well-rounded understanding of how exactly the Chinese economy has been and will be impacted by the COVID-19 crisis. World economists and financial experts can only use projections and past data to foretell what is yet to unfold. China is one of the most influential actors in the world, and while it is being put to the ultimate test, many believe that its economy is resilient enough to withstand the Coronavirus pandemic.

The human lives lost along the way will forever remind the Chinese people of when they came together and decided to work hand in hand with their government, and they were finally able to see the light at the end of the tunnel. Whether you approve or disapprove of how the Chinese government handled this pandemic, it is undeniable that China has set an exemplary approach towards proactive containment strategies. This has encouraged other hard-hit countries to follow suit, hoping they too can reverse the current trend and emerge from this health crisis with success and dignity.