The Impact of COVID-19 on Businesses and the Chinese Economy news
April 3, 2020

Watch the webinar recording

Cheung Kong Graduate School of Business (CKGSB) Professor of Economics Li Wei recently held a webinar on March 27, with Chairman of the American Chamber of Commerce in China and Managing Direct of PGA TOUR China Greg Gilligan relating to the impact of the COVID-19 outbreak on businesses and the Chinese economy, how and when companies expect to recover, where the opportunities lie for businesses and the role governments play in improving conditions.

Here are a few of their key points:

Li Wei:

-In March 2020, the CKGSB Business Conditions Index (BCI), a set of forward-looking, diffusion indices that takes 50 as its threshold, registered at 37.3. An index value above 50 means that the variable that the index measures is expected to increase, while an index value below 50 means that the variable is expected to fall. In February, as people have begun returning to work, a rebound of sorts is reflected in the improved score of 41.3. However, in light of the ongoing and evolving pandemic, which means the impact of government policies in various places will experience a time lag, the rebound remains minimal.

-There are currently two main issues of concern to most people. The first is how long this coronavirus outbreak will last, and the second is what impact it will have on the economy and what we can do about it? With China’s novel coronavirus outbreak appearing to ebb away, overseas infection rates have intensified and states of emergency have been called across the world. The WHO has labeled the Covid-19 outbreak a “global pandemic.”

-As we realise from the Chinese experience, more dramatic strategies save more lives, but incur higher economic costs. We are observing the economy crater, with the first quarter out with a decline of under double digits for the Chinese economy. We saw a range of government policies being swiftly and strongly implemented by China, and we now see China gradually return to normality after two months. It shows that these measures were positive.

-Most concerning is what to expect going forward. For the Chinese economy to grow, firms need to invest and hire more workers. In the past, small- and medium-sized enterprises (SMEs) in China have been very eager to invest and hire, and we see in 2018 there was sharp decline followed by a significant rebound. But COVID-19 has caused yet another sharp decline, as firms resume production, we hope to see this resumption.

-We are very interested in how prices are changing. In fact, many of the executive in our programs are worried about inflation for their businesses- but our data shows, at this moment inflation is not our main concern. Instead, our concern has to do with deflation. Going forward, we may need to reassess the situation.

-China has carried out a range of policies, many of which have been successful. Resuming production is not as easy as turning on a switch, but rather policy support will play a very important role. Firms are willing to resume production, however, if you make them pay the cost if someone gets sick, there will be a great deal of monetary and public opinion risks. It is crucial to transfer the risks to those who are best able to handle them.

-Currently, there are close to a million people diagnosed with COVID-19 and over 40,000 killed by the outbreak. Many governments have implemented mitigation strategies, resulting in 1/3 of the world on lockdown- primarily located in economic centers around the world, significantly impacting the global economy.

-In these situations, support from fiscal and monetary policy is required, to avoid COVID-19 becoming a systemic risk on the economy and facilitate the economy’s recovery.

-Social distancing requirements will temporarily eliminate a number of jobs, even though they seem necessary to control the outbreak. How can we mitigate COVID-19 without permanently damaging the global economy? While the US 2 trillion stimulus package demonstrates large-scale support, it is only 5 weeks of the US GDP. The aim is to flatten the curve of the virus’ growth rate, even though these measures will drive the economy deeper into recession. The emphasis should be placed on why we need to mitigate this. With rent and interest payments that need to be met, we do not want firms declaring bankruptcy, it is much harder to revive businesses once they are bankrupt than it is to preserve or freeze them.

-The COVID-19 outbreak has exemplified the importance of basic health facilities and capabilities, even if such health crisis and pandemics do not occur often, having higher quality services will benefit the population in China and the world. Investment in new medicines will be very important. With COVID-19, I hope there will be more focus on research and treatment of viruses.

-COVID-19 has attacked humans at our heart, and our dependency on social interaction. This virus has survived and spread by riding on that. We are, as a result, impacted severely.

-One of the key lessons that COVID-19 has taught us is that human life is more important. Going forward, perhaps we should focus on the quality of growth, rather than focusing narrowly on reaching certain economic targets.

Greg Gilligan:

-The American Chamber of Commerce in China’s (AmCham) Business Climate Survey tracks American business sentiment in China and the impact of the US-China broader relationship at any given point of time. While we still see the impact of the trade dispute, we also see businesses remaining optimistic about the regulatory environment which, in my view, is to China’s credit.

-When asked how the COVID-19 pandemic was impacting AmCham member business operations in China, 68% responded that they were facing domestic business travel disruptions, while 50% experienced significant revenue declines and 39% answered that demand for their products were down. Half of respondents said that it was too soon to determine the long-term impact of COVID-19 on their China business strategy.

-In terms of industry forecasts for China market growth in 2020, the consumer and R&D industries were found to be most pessimistic about COVID-19’s impact on the 2020 market growth, with 38% of AmCham survey respondents from both industries expecting a decrease of 50% or more. Further, over a quarter of companies in the technology sector and nearly one third of those in the services sector said they planned to decrease investments in China operations for 2020.

-In terms of outlooks on the prospects in light of the COVID-19 pandemic, AmCham survey respondents were found to be most optimistic about the prospects for further reform (42%) and market opening efforts (39%). 75% of respondents hold a pessimistic outlook toward economic growth in light of the COVID-19 pandemic.

-In terms of actions the US government can take to help foreign businesses in China, the survey found that AmCham member companies were seeking commercial support, including advice on business opportunities and support in understanding COVID-19 related business policies and guidance on the phase 1 trade deal implementations.

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