ISSN 2330-717X

High Time For China To Restore Its Economic Order – Analysis

By

By He Jun*

It has been 43 days since China’s battle with the novel coronavirus epidemic begin following the Wuhan Health Commission’s announcement of an “unknown pneumonia” on December 30 last year; 20 days since Wuhan’s lockdown and the mobilization of the entire China. Currently, there are 42,638 confirmed cases throughout China, with cumulative deaths having reached 1016, exceeding that of 1,000. However, the number of newly confirmed cases nationwide continues to decline, falling below the level of February 1. As far as the situation is concerned, prevention and control efforts of the epidemic have now reached its middle stage, where things beginning to descend into period of volatility and decline. Judging at the national situation, the focus of the epidemic is still centered around Hubei, with Wuhan being the epicenter all the same. If Hubei successfully recovers from the epidemic, then China just might have a shot emerging victorious from the ensuing ordeal.

While the battle against the epidemic is looking up, there is another great challenge China needs to face, namely the economic field that is worsening by the day. As a result of several regions in China having adopted the “one-size-fits-all” policy in various fields to contain the spread of the epidemic, China’s economic system has entered into a “dormant” state or what most would tend to call stagnant. There are a few obvious aftereffects resulting from the approach. Firstly, many enterprises are unable to resume work. Apart from a few medical material production enterprises, a large amount of manufacturing and services companies have been put out of business. Secondly, many places are tightly locked down, severely hampering the day to day operations of the logistics and transportation system, which in turn affects production and livelihood. Third, the “dormant” state of the economy has caused enterprises to suffer a lack in income and cash flow, and many micro and medium sized enterprises are on the verge of closure.

Looking at things objectively, under the effects of the epidemic, China’s economic system now lies in a “dormant” and abnormal state. As such, the longer the situation persists, the greater damage China will suffer in its economy. 

The question that remains the be answered, is how long can the Chinese economy withstand such disruption? ANBOUND’s Chief Researcher Chan Kung estimates that the threshold would be the end of March, this year. According to China’s governmental organization, the logistics industry is expected to make a 40% comeback by mid-February, and a full-on comeback later in early March. The logistics and transportation industry will affect the flow of people and the market. Thus, even if the policies designed to resolve restrictions are in place and the “lockdown” order of various cities is lifted by the end of March, it will still take time for the industrial and supply chains to recover. If China’s economic order returns to normal by the end of April, that would be certainly ideal.

The act of ”activating” policies is one thing, but implementing them is another. From a business operation’s perspective, if January was considered de “holiday season” and falls within most companies’ budgeting, then the continuous halt in operations between February to April will cause many companies to suffer a loss in three consecutive months’ worth of production and operation time. If the implementation of the policies can happen according to the proposed timeline, then everything will return to normal. However, even if that happens, what’s worrying is that should the various preferential policies are not properly placed following the epidemic and are but mere words without practice, the already declining Chinese economy may be affected by the epidemic, which would then lead to recession, or a much worse state if any. 

To prevent the risks from further worsening, ANBOUND believes that the central government of China should make early decisions to restore normal economic order in most parts of China without any delay, whilst continuing its battle against the epidemic. 

As far as public policies are concerned, a methodical approach can only be made if the government’s battle against the epidemic are coordinated in tandem with their economic efforts. An obstacle that currently stands between them is the issue that existing government goals tend to clash with that of economic ones. Currently, the government’s goal is to overcome the novel coronavirus epidemic at all costs. However, corporate and economic goals involve smooth flow of goods, the mobilization of its employees, and the need for factories to operate, all of that which means China cannot face a complete lockdown. Seeing that the resumption of businesses in China are required to go through rigorous examinations and approvals for the time being, and the staffs require a 14-day isolation, then how can businesses and economic activities possibly resume? As it stands, the contradictions between two sides of policies implies that economic growth is being foregone.

To restore economic order and to ensure the fight against the epidemic is well handled, scientific classifications and segregation of zones are needed in China. Considering that the state of the epidemic varies from places to places, the level of epidemic prevention should also be tailored accordingly. On a national level, consideration should be given to dividing infected and non-infected areas, or severely affected areas and safe areas. Under strict conditions of office quarantine and in accordance with health and safety standards, as well as with the plan, the one thing that can be achieved now is restoring urban order in several larger regions and encourage enterprises to resume operations. For a few areas severely affected by the epidemic, such as Wuhan and other parts of Hubei, focusing on combating the epidemic through the pooling of national medical resources is still very much a priority.

The aiding policies should meet the actual needs of enterprises, and the related authorities should not give thoughts to meaningless preferential policies that cannot be implemented. Take micro and medium-sized enterprises for example, the most important preferential treatment is the reduction of the five types of insurance (endowment, medical, work-related injury, unemployment and childbirth) and house accumulating funds. For enterprises, these insurances and funds have increased their burden, accounting up to 60% of the labor cost. According to Cao Dewang, the chairman of the glass manufacturer Fuyao Group, these insurances and funds consume up to 40-50% of the wage costs. The additional burden on businesses in recent years has increased year by year. Last year, efforts had been made to reduce costs, though this does not include the aforementioned insurances and funds. Hence, the preferential policies are rendered ineffective. If it can be reduced or exempted in the areas that have the greatest impact on enterprises, the effect will be better, and it will have the most stimulating effect on enterprises to resume production. 

The restoration of logistics and transportation systems requires the integration of the entire country. Concerning the termination of lockdown in various parts of China, that requires an overall consideration. If the timing and standards of the policies to terminate the lockdown in various regions are not well timed, meaning each region’s lockdown ban is lifted in their own time, then that is not terminating the lockdown in the strictest sense. That also means that goods circulation and the flow of people are still being restricted. As such, workers cannot return to work and the market will certainly not return to a normal state either. Therefore, the unblocking of logistics and people flow must be properly integrated throughout China to function efficiently. 

Many are now comparing the novel coronavirus epidemic with SARS and believe that the rapid recovery of the Chinese economy following the SARS epidemic in 2003 supports their optimistic prediction that the future outlook of the Chinese economy would be the same as then. However, an obvious flaw in such comparison is that it ignores the fact that the current Chinese economy is far different from the state of economic elasticity that it was in 2003. During 2003, the country’s economy was in a period of rapid advancement following its admission into the WTO, and had huge economic elasticity and comparative advantages. While China’s current economic scale remains huge, its economic resilience is much smaller. Various internal structural problems in the country, as well as the deterioration of the external environment have increased the country’s future risks.

Final analysis conclusion:

Looking at things from a macro perspective, China ’s battle against the novel coronavirus epidemic has reached its middle stage. With the solidifying of the results concerning measures against the epidemic, the risks brought about by the “dormant” economy are increasing significantly too. China needs to make an early decision and persist in restoring economic order in most parts of the country whilst ensuring its security. If that isn’t accomplished, even if China finally contains the epidemic, slipping into a state of economic hardship would mean that China failed to emerge victorious at the end of it all. 

*Mr. He Jun takes the roles as Partner, Director of China Macro-Economic Research Team and Senior Researcher. His research field covers China’s macro-economy, energy industry and public policy.



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Anbound

Anbound

Anbound Consulting (Anbound) is an independent Think Tank with the headquarter based in Beijing. Established in 1993, Anbound specializes in public policy research, and enjoys a professional reputation in the areas of strategic forecasting, policy solutions and risk analysis. Anbound's research findings are widely recognized and create a deep interest within public media, academics and experts who are also providing consulting service to the State Council of China.

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