Market Report: China

The World Health Organization was alerted to several cases of pneumonia in Wuhan City, Hubei Province of China on 31 December 2019. The virus did not match any other known virus which raised concerns.

The following week, 7 January, Chinese authorities confirmed that they had identified a new virus, coronavirus, which is a family of viruses that include the common cold, and viruses such as SARS and MERS. This new virus was temporarily named ‘2019-nCoV’.

WHO has been working with Chinese authorities and global experts from the day news broke around the world, to learn more about the virus, how it affects the people who are sick with it, how they can be treated, and what countries can do in response. On 28 January, WHO Director-General, Dr Tedros Adhanom Ghebreyesus, met President Xi Jinping of the People’s Republic of China in Beijing. They shared the latest information on the coronavirus 2019 (2019-nCoV) outbreak and reiterated their commitment to bring it under control.

John Quelch, Dean of the Miami Herbert Business School at the University of Miami, told US media outlet, Bloomberg, in January that “there is a significant dent to consumer confidence in China” following the outbreak. “It is extremely important for the Chinese Government’s credibility and legitimacy that they maintain safety and security hence the very substantial and ‘draconian’ such as cutting off transit to cities with millions of people to try and get the problem under control.”

When compared with the SARS outbreak coronavirus has already surpassed the number of infected by SARS in a few weeks, compared to the nine-month period that spanned 2003.

China’s economy, with nearly 57 million people in 15 cities on lockdown for the next several weeks, has slowed dramatically with factories and transportation networks across much of the country in shut down.

Quelch said the short-term economic impact i.e. home confinement of consumers, would lead to a reduction in sales at retail stores, hotels, tourism and travel at a critical time when the Chinese economy was showing signs of slowing down. He added that these are contributing factors to a disruption to the country’s supply chain.

“Wuhan is a very important industrial centre, it’s essentially the Chicago of Northern China,” Quelch said – explaining it is a big steel producing area. Dongfeng Motor Corporation is one of the heavy machinery manufacturers currently headquartered there that supplies components and parts to many companies throughout China.

The outbreak, according to the International Transport Workers’ Federation (ITF) occurred during the Lunar New Year – a major holiday in China associated with decreased manufacturing and exports activity. All factories were closed for the time being after the Chinese government announced that the holiday period would be extended another three days. At the time of writing, there was speculation among mainstream media that the holiday period would be further extended to 10 February.

Factories in the manufacturing hub of Suzhou, in eastern China, were closed through 8 February. Shanghai, Zhejiang Province and Guangdong Province, as if by domino effect, announced all enterprises would remain closed until 9 February.

Deutsche Bank equities analyst Amit Mehrotra said in a client note that FedEx is “most directly impacted (via the company’s sizeable transpacific airfreight capacity), followed by companies with disproportionate exposure to China imports such as JB Hunt Transport Services and Union Pacific Corporation”.

The Wall Street Journal reported that vessels were being held back by China from entering Wuhan, Hubei Province, a major trade hub in the region accessed by a major trade route on the Yangtze River.

Chinese authorities announced a ban on all forms of wildlife trade and implemented strict regulations on activities related to wild animals.

Shanghai’s local authorities suspended commercial activity, including all operations of companies not involved in the medical field until further notice.

The international fallout was swift. On 30 January a ‘partial shutdown’ ordered by Hong Kong’s leader, Carrie Lame, was sanctioned across several border checkpoints, including reducing cross-border transit, shutting down rail and ferry service to China, halving flights and decreasing tour buses.

According to Bloomberg Facebook put a stop on all non-essential travel to China and Starbucks temporarily closed some of its China stores.

The BBC reported Chinese gaming giant, Tencent, and the tech company, ByteDance, which owns the app TikTok, told staff to work from home.

The full extent of the coronavirus outbreak, and its widespread effect on China and the world, is yet to be quantified.

China’s next dilemma will be fulfilling the phase one trade deal, of which it is stipulated that it must buy $200 billion USD in additional products from the US over two years on top of pre-trade war levels, reported the South China Morning Post.

Meanwhile, the latest reports from LevaData, a software firm that delivers applied Artificial Intelligence (AI) to transform strategic sourcing and procurement, has identified some of the key challenges that may impact trade between China, the US and the rest of the world.

A survey flagged tariffs as a primary concern for trade based on survey responses from a sample of 100-plus manufacturing and production executives in the high tech, consumer goods, industrial, automotive and life sciences industries.

“Concerns regarding tariffs are clearly top of mind for enterprise manufacturing executives,” said LevaData founder and CEO, Rajesh Kalidindi. “The good news is that emerging technologies can help predict the likelihood of new tariffs and other risks, allowing supply chains to build contingency plans.”

A majority of manufacturing executives, according to LevaData, report that a global recession is likely in 2020 (61 per cent) and that an extended trade war would likely lead to a global recession (70 per cent).

When survey respondents were asked what issues are likely to have the greatest impact on their company in 2020, trade restrictions (42 per cent) were the biggest concern by far, followed by geopolitical instability (15 per cent), natural disasters (12 per cent) and impeachment-related uncertainty (11 per cent). Despite  Brexit, only 7.0 per cent expressed concern about this issue.

Also, the executives were concerned that an increase in tariffs would mean: paying more for goods and services (48 per cent), paying more for parts and labour (47 per cent), worsening relations between the US and China (43 per cent), seeing workers out of jobs (44 per cent), paying workers more (31 per cent) and consumers will pay for increased production costs. The vast majority of the executives surveyed (89 per cent) agree that tariffs will increase production costs. Most estimate this increase at 10-20 per cent over the course of the year. More than two-thirds expect both their production costs (71 per cent) and material costs (67 per cent) to increase.

As a result, 79 per cent said they are likely to increase the price of their goods and services. When asked what tactics their company will likely pursue in the event of increased production costs, passing the cost along to consumers ranked number one. This was followed by trying to find cost savings elsewhere in the company, reducing profit margins and renegotiating part supply deals.

By industry, respondents expect electronics (60 per cent), automotive (42 per cent) and agricultural products (39 per cent) in particular to bear the brunt of the trade war’s impact.

Despite the near-term downsides of the trade war, the surveyed executives are optimistic about long-term outcomes. Broadly speaking, only 22 per cent of manufacturing executives do not support imposed tariffs. Nearly a third (32 per cent) actively support them, and 46 per cent are neutral. Other survey results found: 65 per cent think the tariffs will ultimately lead to improved global trade practices; 40 per cent believe they will lead to improved US-China trade relations in 2-3 years;  37 per cent claim their supply chain operations will run more smoothly in the long term; and nearly half (47 per cent) said the tariffs will ultimately lead to economic growth in the US. However, an almost equal number (46 per cent) believe they will lead to economic decline.

With so many variables in play, including the containment of a viral outbreak, bringing manufacturing back on track and working on ideally improving and easing relations with major trade partners, it is difficult to discern what the near future might look like for China. Renowned for being home to some of the world’s top trailer manufacturers in terms of high-volume output, this context could be the fulcrum that levers a revolution in the state’s productivity and comeback story.

Fast Fact
The Chinese economy, according to analysts at Trading Economics, expanded by a seasonally adjusted 1.5 per cent on quarter in the three months to December 2019, following a downwardly revised 1.4 per cent growth in the previous quarter and matching market consensus. “In China, the growth rate in [Gross Domestic Product – GDP] measures the change in the seasonally adjusted value of the goods and services produced by the Chinese economy during the quarter. As China’s traditional growth engines of manufacturing and construction are slowing down, services have emerged as the new driver. In the last few quarters strength in services and consumption helped to offset weaker manufacturing and exports.”

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