Coronavirus Causes A Dramatic Collapse Of China’s Economy

March 17, 2020

Beijing (Forbes) - A series of newly released economic indicators show a dramatic decline in China’s economy due to the coronavirus outbreak. The collapse in industrial production, retail sales and fixed-asset investment was much more serious than analysts had expected. The data, released Monday, can serve as a warning to other countries as to the coronavirus’ toll on the economy.

 

Industrial production, a gauge of manufacturing, mining and utilities activity, dropped 13.5% in January and February compared with the same period last year. The indicator fell for the first time since records began, in July 1998. 

 

The decline is fueling concerns that China's economy will contract in the first quarter – the first such contraction since the end of the Cultural Revolution, in 1976.

 

The data come after weeks of factories and businesses being shuttered and people living mostly isolated in their homes, a scenario that is starting to be replicated in Europe and North America. In late January, the Chinese government took the first measures to shut down transportation links. Authorities later put entire cities under quarantine in Hubei province, where the coronavirus originated, and elsewhere in the country.

 

The isolation hit retail sales, which collapsed 20.5% in the first two months of the year. Analysts polled by Bloomberg had expected only a 4% drop.

 

Similarly, fixed-asset investment, which measures expenditures on things like infrastructure and property, plummeted 24.5% - the indicator’s first contraction on record. Analysts had expected only a 2% decrease. 

 

“The coronavirus is the simple explanation to these unprecedented drops in core economic indicators,” says Rory Green, an economist focused on China at the London-based consultancy TS Lombard. Green posits that the predictions missed the mark for three reasons: first, because China had started in January to show signs of building economic momentum; secondly, because the nationwide lockdown partly coincided with the Lunar New Year holiday, when businesses would have been closed anyway; and thirdly, because there were doubts Beijing would allow such negative numbers to be published. 

 

“The bottom has definitely been reached,” Green says. “The question now is the speed and strength of the recovery.”

Factories have started to reopen gradually across China’s provinces. In many cases, the return to work has happened in stages. Sun Huimin, president of Jiangyin Donglian High-Pressure Pipe Fitting in eastern Jiangsu province, says local workers were the first to return to his factory, while many of the employees who had traveled to other provinces during the Lunar New Year had returned but were still in isolation in their homes. Sun says he expects production and orders to pick up by April or May.

 

People’s isolation will continue to affect both industrial production and consumption for the near future, says independent economic analyst Ye Tan. “The rate of work resumption is indeed beginning to rise, and we know that the amount of electricity and power generation has also started to rise, but it will take a while to fully resume production,” she says.

 

Ye says she expects the government to stimulate consumption and boost investment “in new and old infrastructure … on a large scale.”

 

The flip side of a large government stimulus is that it’s going to weaken China down the road, Green says, making the economy less efficient and less sustainable.

 

Meanwhile, analysts say March will be a decisive month in terms of whether an economic recovery can be expected in the first quarter.

 

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