As the world grapples with the societal impacts of the CCP (Chinese Communist Party) virus, commonly known as the novel coronavirus, the economic toll in its country of origin has led to the worst results in China Beige Book (CBB) history.
Data for the first quarter of 2020 gathered by CBB, a research service that uses data from over 3,300 firms to track the performance of China’s economy across key sectors, industries, and regions, is in uncharted territory.
“For Q1 as a whole, a 10–11percent GDP contraction is not unreasonable,” according to CBB’s Early Look Brief for Q1 2020, released March 23.
As the global demand falls, the economy swoons—but the dependence on China looks to be decreasing. A wave of deglobalization could be picking up as supply chains diversify away from China.
“If you are in corporate strategy, you should absolutely start to think about how you decrease your reliance on Chinese factories, as far as various parts of your supply chain are concerned. And to what extent do you shift it out?” CBB International’s managing director Shehzad Qazi told The Epoch Times.
In the short term, Qazi is not expecting a massive move of supply chains out of China, but he says it is absolutely happening incrementally.
The United States is encouraging the shift out of China to happen in key industries like pharmaceuticals. Other industries, however, like auto parts, certain textile manufacturing, and technological components may not be able to move anytime in the near future, Qazi says.
“From a corporate strategy standpoint, operation standpoint, I think we are going to have firms increasingly looking at how to lessen your reliance on China,” Qazi said.
Falling Off a Cliff
It’s the first time in nearly a decade of tracking the Chinese economy that CBB’s headline metrics like revenue and profits have sunk into contraction territory.
“Every individual sector has also seen deteriorating results since February,” said CBB.
Data looks gloomiest for the services sector, which is showing the highest percentage (49 percent) of firms with a greater than 10 percent decline in quarter-over-quarter sales volume.
But for the situation to improve, China’s recovery depends on factors beyond its control.
A potential dynamic, Qazi says, is that Chinese factories may be back producing in April and May with domestic demand picking up, but June’s data (for the second-quarter report) will show that export orders have plummeted because of the rest of the world still being shut down.
“That’s always a likelihood that now you get the demand shock side of the story getting hit in Chinese factories,” Qazi said.
The current problem of undersupply due to Chinese factories being shut down will switch to oversupply from China, says CBB.
It warns that investors better not overestimate the extent to which China can cushion a global downturn. For the authorities to admit a terrible first quarter is a sensitive subject because China may have to admit poor second-quarter numbers due to Europe and the United States effectively being shut down.
And how much ongoing demand will return is an open question, as companies are being advised to rely less on China. Therefore, the Chinese economy could have less influence on global GDP going forward.
An additional factor that accelerates the decoupling of the U.S. and Chinese economies is the growing awareness of the CCP’s mismanagement of the coronavirus outbreak, wrote Macdonald-Laurier Institute Munk senior fellow Sean Speer in a March 20 National Post op-ed.
“There’s a good chance that we will eventually look back on the past couple of weeks as the end of globalization as we’ve come to know it,” Speer wrote.
The Epoch Times refers to the novel coronavirus, which causes the disease COVID-19, as the CCP virus because the Chinese Communist Party’s coverup and mismanagement allowed the virus to spread throughout China and create a global pandemic.