Chen Wenling: The Impact of the COVID-19 Pandemic on China’s Economy

The impact of the sudden outbreak of the novel coronavirus on China is much greater than that of the Severe Acute Respiratory Syndrome (SARS) in 2003. It will affect both the Chinese and world economy. The magnitude of the impact would depend on how long it takes to fight the pandemic and win the battle. However, the fundamentals of China’s long-term economic improvement remain unchanged. If the pandemic can be put under control quickly, we can still expect a great economic development in 2020.

Chen Wenling, Chief Economist of CCIE, made five predictions on the impact of the novel coronavirus on China’s economy.

First of all, the outbreak of the pandemic will lead to a decline in China’s economy, but the fundamentals of China’s long-term economic improvement remain unchanged.

China’s economy will be hit hard in the first quarter due to the pandemic and the economy as a whole is likely to decline in 2020. However, the basic elements for maintaining steady economic development have not changed. The economic resilience and policy room will not be changed due to the sudden outbreak. The impact of the pandemic would depend on when can we bring the pandemic under control, which can be summarized in the following three scenarios.

The first scenario is that the pandemic can be brought under control before the end of February: the GDP growth in the first quarter would be around 5%, rise to more than 5.5% in the second quarter, 6% in the third quarter, and probably exceed 6% in the fourth quarter. The annual growth would be 5.5% -6.0%.

The second scenario is that the pandemic can be brought under control before the end of March: GDP growth in the first quarter would fall below 5%, affecting the rebound in the second quarter, which will reach a maximum of 5%. In the third quarter, growth may reach 5.5%. In the fourth quarter, growth could be about 6%. The optimistic estimation for the whole year would be about 5.5%.

The third scenario is that the pandemic will last longer and will not be brought under control until June or July: GDP growth may be less than 4.5% in the first quarter, and the whole year will fall below 5%.

If we can control the pandemic as soon as possible, we will have a better chance to reduce the loss in the first quarter and get the economy back on track later this year. Otherwise, the pandemic will have a great impact on the economy.

Secondly, the tertiary industry will suffer the most but there will be substitutions.

The tertiary industry is the hardest-hit industry, especially the industries involving food, travel, movie, study and transportation.

The catering industry in China worth more than four trillion yuan and the average revenue generated in one quarter is more than one trillion yuan. At least half of the first quarter will have no business, which means that the catering industry will lose 500 billion yuan. Other industries such as tourism, film, hotel, exhibitions, transportation, education and training will also be hit really hard.

However, there will also be some new growth points in the tertiary industry, such as online retail, online medical care, online games, and logistics and express delivery. Some of the businesses in the tertiary industry are substitutable, especially the service methods and buying behaviors. The pandemic has changed the way people purchase and consume and might lead to the emergence of new industries. The express delivery industry has experienced explosive growth. Consumer demand is expected to grow much faster when the pandemic is over.

Even if the pandemic can only be controlled in the medium term, the decline in the tertiary industry will not be too disappointing because of the balanced consumer demand. When the SARS broke out in 2003, China’s tertiary industry accounted for 42% of the GDP and increased to 54% in 2019; the contribution of consumer spending to GDP rose to 57.9%. The total consumption demand and the growth of the tertiary industry in 2020, including the growth of consumer goods sales, will not be significantly reduced, nor will the total demand of the tertiary industry, but the way of supply will change.

Thirdly, the pandemic will impact imports and exports, but the trend of continuous growth remains unchanged.

We can still expect a positive trend in terms of imports and exports despite the pandemic. According to the General Administration of Customs, China’s imports and exports reached 31.54 trillion yuan in 2019, a year-on-year increase of 3.4%. The total imports and exports in the first quarter were 7.03 trillion yuan, 7.68 trillion yuan in the second quarter, 8.26 trillion yuan in the third quarter, and 8.59 trillion yuan in the fourth quarter. If the pandemic did not happen, the total value of foreign trade should be at least the same as the first quarter of last year.

The pandemic has prolonged the suspended production of export-oriented companies after China’s Spring Festival, meanwhile, imports and exports will also decline significantly. However, Guangdong, Zhejiang, Jiangsu, Shanghai, Shandong and other provinces with large exports have not been affected too much by the pandemic. Imports will increase greatly.

Fourthly, the pandemic will reduce the output of the manufacturing industry, but the overall advantages of the manufacturing industry remain.

The output of the manufacturing industry in the first quarter have been dramatically affected because factories did not anticipate the deterioration of the pandemic before China’s Spring Festival. One exception is suppliers of medical products and daily necessities. Medical supplies have grown significantly since the breakout of the pandemic, nonetheless, they only account for a relatively small portion of the manufacturing industry. Whether new growth will occur after the manufacturing industry resumes production will ultimately depend on when can we put the pandemic under control.

In my opinion, the output of the manufacturing industry will drop by more than 30% in the first quarter. If the pandemic can be quickly put under control, we can have an optimistic forecast on the manufacturing for the whole year because of the overall advantages of Chinese manufacturing. China has the world’s most complete manufacturing system, industrial chain, supply chain, service chain and value chain. Most of the manufacturing industry clusters are still in China and the transformation and upgrading of the manufacturing will provide great support to the high-quality and sustainable development of China’s manufacturing industry.

The US Secretary of Commerce Wilbur Ross said that the pandemic outbreak in China will bring employment and manufacturing back to the United States. I am afraid this is only his own wishful thinking because this is not going to happen in the short term. The cost of transferring the industrial chain, supply chain and service chain is very high and it takes a long time to achieve that. Plus, it takes years to form the service supporting capabilities for the industrial chain. Investors will think twice before transferring their manufacturing from China to other countries. Certainly, some companies might move their production back to the United States because of the tremendous pressure they have, and other companies choose to re-allocate their production to other low-cost countries due to the rising manufacturing costs in China since 2008, but this has nothing to do with the pandemic and it will not change the overall advantages of China’s manufacturing.

The pandemic will bring a sharp decline to China’s manufacturing industry in the first quarter, but production will be resumed gradually. Once the pandemic is under control, the manufacturing will make up for the loss in the first quarter and experience extraordinary growth. The growth rate for the whole year will be slightly lower than last year.

Last but not least, the central and local governments have introduced policies to help enterprises during hard times.

The Party Central Committee has taken strong measures to fight the pandemic. Governments at all levels have introduced various policies and measures to restore economic growth and support enterprises. Ministries and local governments have adopted various actions to resume production and minimize the disruption to people’s daily life. Recently, the Suzhou Municipal government has introduced policies and measures to support small and medium-sized enterprises, including financial support, maintain a stable workforce and reduce enterprises’ burden. The government will continue to increase tax and fee reductions, cut interest rate and take other measures to help companies overcome this difficult period.

To sum up, we must be fully prepared for the economic losses caused by the pandemic. We must not be too optimistic or pessimistic and meanwhile, the following two suggestions will help us to fight the pandemic.

On the one hand, we should remain calm and assess China’s economic growth rationally. Governments at all levels, economists, entrepreneurs and the general public should correctly view the decline in GDP and must be fully prepared for the continued decline. They should not only focus on the GDP growth rate. China’s economic development has shifted from a high-speed growth stage to high-quality development. Right now, the safety and health of the people is the most important thing, not the GDP growth. There is no need to panic about the economic downturn because panic will only make things worse.

On the other hand, we should come up with supporting policies to help enterprises. The government should send a clear signal to private companies that it will do everything to help them, such as increasing financial support, reducing financing costs, or offering enterprises interest-free loans to resume production. If enterprises are unable to pay their employees, they should be allowed to borrow and pay. Nowadays, private enterprises account for 50% of China’s total tax revenue, 60% of GDP, 70% of innovation, 80% of employment and 90% of the total companies. Therefore, stabilizing private enterprises and small and medium enterprises will help us to stabilizes China’s economic development and employment. Meanwhile, we must also support the development of state-owned economy and enterprises and they will play an important role during these difficult times.