Coronavirus Crushes China’s Economy But the Worst Is Yet to Come

Posted in: HeadlinesOp-ed
April 17, 2020 10:29 AM UTC

The novel coronavirus pandemic has caused a massive contraction in the economy of China, but this may just be the beginning.

  • Coronavirus sends China’s economy crashing in Q1 2020, for the first time in decades.
  • A massive unemployment crisis lingers in China.
  • More damaging times lie ahead as COVID-19 fallout sours ties.

The novel coronavirus pandemic had its origins in China, and the country was at the receiving end of widespread criticism as the COVID-19 disease spread across continents around the world.

China had to enforce a lockdown that extended beyond two months to contain the outbreak, and not surprisingly, it has led to a massive economic meltdown.

Source: Twitter

Coronavirus brings China’s economy to its knees

The Wall Street Journal reports that China’s economy contracted 6.8 percent in the first quarter of 2020 as compared to the prior-year period. This was the first contraction in the country’s quarterly gross domestic product (GDP) since it began reporting the metric 28 years ago.

The quarter-over-quarter contraction was much higher, at 9.8 percent. This massive hit to China’s economy isn’t surprising as demand seems to have fallen off a cliff.

Bernstein Research reports that auto sales in China could slump 15 percent in 2020. The industry took a significant hit in February as sales crashed 82 percent. Lockdowns were in full swing across the country at that time – forcing 800 million people to stay at home during the quarter. That resulted in a 13.5 percent drop in manufacturing activity in China.

What’s more, the novel coronavirus pandemic has created a massive unemployment crisis in China. According to Liu Chenjie, the chief economist of fund management firm Upright Asset, as many as 205 million people in China may have been put out of a job due to the COVID-19 outbreak. This means that more than 25 percent of China’s entire workforce may currently be unemployed.

A woman wearing a face mask rides her scooter in Wuhan, the central Chinese city where the COVID-19 coronavirus first emerged last yea. The city partly reopened on March 28 after more than two months of near total isolation for its population of 11 million. | Source: NOEL CELIS / AFP

The loss of unemployment is bound to weigh on consumer spending, which is a critical cog in China’s GDP wheel. Reports suggest that consumer spending in China fell a whopping 23.7 percent year over year in the first quarter. Forecasts for China’s GDP growth in 2020 have dropped to zero as compared to the prior expectation of close to six percent.

All of this indicates that China will witness severe fallout of the novel coronavirus pandemic. The problem is that things may not turn around any time soon, and they could get worse.

Woeful times lie ahead

China’s pivoting role in the spread of the novel coronavirus pandemic has earned it the wrath of countries across the globe. This has led a few economies to consider reducing their reliance on China for their manufacturing needs.

China was already in the midst of a manufacturing exodus due to rising costs, and the trade war with the U.S. Coronavirus may have accelerated that as Japan has set aside $2.2 billion to enable its manufacturers to move their business out of China. Japan is the biggest trading partner of China, so such a move is bound to have a negative impact on Chinese factory output.

Source: Twitter

Similarly, the U.K. has also warned that it won’t be restarting “business as usual” with China in the wake of the novel coronavirus outbreak. Dominic Raab, the U.K.’s First Minister of State, said in an interview:

There absolutely needs to be a very deep dive on lessons including on the outbreak of the virus and I don’t think we can flinch from that at all.

We’ll look very carefully with other international partners at how this outbreak happened.

So, there’s a chance that factories may not return to full production any time soon as important global economies reconsider their relationship thanks to the novel coronavirus. The country reportedly employs 180 million workers in export-related jobs, and a lot of them could be at risk if more countries take the route that Japan and the U.K. are going.

When the global coronavirus curve starts to flatten, China faces a long road to economic recovery ahead, and that is not going to be an easy one in a post-coronavirus world.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.

This article was edited by Samburaj Das.

Harsh Chauhan @techjunk13

Harsh has been covering financial markets on CCN since 2019. He has also written for other reputed publications such as The Motley Fool, TheStreet, and Seeking Alpha, and gets regularly featured on Yahoo! Finance. Harsh is based out of Indore, India. You can follow him on Twitter @techjunk13 or email him at harsh.chauhan(at)outlook.com.

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