ISSN 2330-717X

China Needs To Handle Production Resumption Policy With Calm – Analysis

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By He Jun*

As Covid-19 continues to ravage the world, China takes the lead in freeing itself from the ordeal by controlling the pandemic and pushing its businesses to restore production to normalize economy. Compared to the damages seen in the United States and other European countries, China’s victory against Covid-19 is astonishing, and the market has high hopes about China’s economic recovery.

As the “world’s factory”, China’s ability to resume production and businesses will be the key in determining if it can properly restore its economy, though opinions on the issue remain divided. On March 17, Meng Wei, a spokesperson for the National Development and Reform Commission (NDRC), said that barring individual provinces like Hubei, the resumption rate of industrial enterprises above designated size in other provinces (including autonomous regions and municipalities) in the country has exceeded 90%.

In places like Zhejiang, Jiangsu, Shanghai, Shandong, Guangxi, Chongqing, the rate is close to 100%. On April 15, Qin Zhihui, deputy director of the SME Bureau of the Ministry of Industry and Information Technology, shared the national SME resumption rate was 84%. In terms of industries, the resumption rate of secondary industry is higher than producer services industry, which in turn, is higher than that of life services industry. On a regional level, the resumption rate in 25 provinces has exceeded 80%.

Meanwhile, on April 20, Peng Huagang, a spokesperson for the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), stated the rate of resumption of work in China’s central enterprises has reached 99.4%. Then, on May 1, Gao Feng, a spokesperson for the Ministry of Commerce, said that the resumption rate of life service companies nationwide has reached more than 80%.

There is no doubt that the resumption, and the restart of manufacturing & services activities has revitalized various industrial links. It has created many job opportunities for industrial workers. Local governments have done much to resume production. One can only imagine how daunting it can be to help assimilate hundreds of millions of workers back into their jobs.

Foreign investors too, are noticing the changes brought by the resumption. In an article discussing Chinese foreign companies’ resumption by American magazine Barron dated May 6, Kevin Johnson, President and CEO of Starbucks was quoted saying, “Today, almost 100% of our stores in China are open…For the month of April, comparable-store sales in China were down approximately 35%, marking strong improvement from a weekly low of minus 90% in mid-February…We believe, barring any new disruptions, that our business in China is on a path to substantial recovery by the end of [the third quarter].”

Tom Linebarger, CEO of Cummins, also said, “First-quarter revenues in China…were $1.1 billion, a decrease of 19% and were significantly impacted by COVID-19-related shutdown. The pandemic started to impact industry production of equipment in early February, and the majority of our facilities experienced shutdowns of four to six weeks in length. All of our manufacturing facilities in China were fully operational by the end of the first quarter, and we have experienced high levels of demand since reopening as OEMs prepare for a rebound in demand.”

Meanwhile, the same magazine also reported that Edward Breen, CEO of DuPont, stated, “In the first quarter in China, our sales were down organically 1%, which actually surprised me that it was that good considering we were shut down for a few extra weeks. But in April, our sales are up 6% to 7% in China. So we’re clearly seeing the comeback there. And again, things aren’t totally back to normal over there, but from a minus 1% to a plus 6% or 7%, it’s pretty impressive.”

However, things are not always that simple. Just because China has successfully freed itself from the pandemic, it doesn’t necessarily mean that its economy will return to normal. The same goes for resumption in individual industrial link, industrial and supply chains included. It should be noted that those who fared better in the current resumption are typically large and medium-sized enterprises, specific ones that is, and that their recovery does not reflect the market’s overall recovery either. For small and micro enterprises, it is much more difficult to resume operations as per usual than previously estimated.

Very few people know that 80% of the world’s watches come from China, and 80% of the production happens in Guangdong. Guangdong’s watch industry is mainly low-end and international OEM. Hong Kong’s Dailywin Watch, which has invested and set up a factory in Guangdong for 31 years, is one of the renowned companies in the Guangdong watch industry, with an annual output of more than 3.6 million watches and 700,000 sets of Swiss high-end watches.

Eddie Leung, executive chairman of the Dailywin Watch, admitted that the COVID-19 pandemic was the biggest crisis he had faced thus far, and that the Guangdong watch factory, which is highly dependent on external orders for survival, is now facing a matter of life and death. Beginning March, 90% of Dailywin Watch’s employees returned to work. After a week of high-speed operation, productivity returned to 93%, driving upstream enterprises to resume work in March. Unfortunately, the unforeseen pandemic outbreak in other countries has completely disrupted the rhythm of resumption. Certain countries in Europe and the United States are locking down cities and even countries. Customs have stopped operating and Dailywin Watch had to suspend shipments. Eddie Leung believes four obstacles stand in way of resumption. One, the company must notify customers of a delayed shipment. Two, if production is to be suspended, it will affect future resumption. Three, if the customer resumes logistics in May, can the company fulfill the orders with its current supply of stocks? Will it lose the customers’ confidence and perhaps, even the orders it received previously? Four, there is difficulty in funding. The company requires funds to maintain production, pay wages, and purchase spare parts.

The above example shows that under the backdrop of reduced overseas demand, the withdrawal of orders, and the interruption of global supply chains, business resumptions in China is merely part of a link, hence the industrial chain’s recovery will not necessarily guarantee economic recovery itself.

Researchers at ANBOUND believe that if the policy department cannot provide tax cuts, financial support or interest-free loans to small and medium-sized enterprises, the only effective policy would be to encourage small and medium-sized enterprises, especially those affected by the global market, to force their employees to go on unpaid leave and freeze their businesses. Compared to a blind attempt at enabling resumption, at least such a policy will ensure the “chickens can continue laying eggs” or some degree of survivability. While this may cause unemployment to spike suddenly and cause certain employment pressure short term, the enterprises will survive. They can wait for the market to pick up again before starting all over. If enterprises are forced to resume work without being able to lay off their employees, then they can only survive for a shorter time, which is worse off for everyone.

Therefore, China should remain calm while dealing with the policy, and enforce resumption by situation, or the consequences will be severe. Just to give a picture of how bad things are… some companies are already facing a large number of accumulated products, they are running low on funds and are given little to zero assistance, coupled with heavy burden of employee salaries and the cost of invalid operation, they will be put out of business sooner if they were forced to resume production. This is because they will be spending their operating funds quicker than they count.

ANBOUND has repeatedly stressed that the pandemic-caused economic crisis may last up to 2 years, and it is unrealistic to flip the economy in a V-shaped manner on a macro level. The Union of European Football Associations (UEFA) even believes that the impact is expected to linger for 3 years, and the Olympic Committee is discussing whether to cancel the 2021 Olympics. Japan has made it clear that they are ready to give up the 2021 Olympics if it cannot be held within its proposed timeline. It can’t be stated enough that an economic resumption following a sudden brake is not just a single company’s problem.

In fact, any company must wait for the links in the entire supply chain to be reestablished before anything else can follow suit. As long as there is a problem or a delay in a link, the entire chain will fall. Put simply, resumption is a process of restructuring production, it is highly complicated and time-consuming. To that end, we suggest that policy departments respond appropriately and reasonable to economic recovery, instead of demanding for resumption blindly. As it stands, there is not much time on hand to solve the problem.

Final analysis conclusion:

The resumption of businesses will serve as a key indicator for China’s post-pandemic economic recovery. It is also a part of the economic recovery plan that many local governments and departments are working hard to promote. However, the pandemic, the interruption of global supply chains, and changes in overseas market demand have raised new challenges to the attempt. To sum it up, China must keep calm in the face of resuming production, instead of adopting a one-size-fits-all approach. It should introduce a series of flexible policies to preserve the industrial ecology composed of small and medium-sized enterprises and maintain their position as market players for future economic recovery.

*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.

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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