As China expands lockdowns to many more cities to curb the spread of the novel coronavirus, a crisis of supply chain disruption will arise when all manufacturers run out of inventory due to the stagnation of labor, transportation and procurement of supplies. A massive number of companies could collapse in China within one or two months, an economist predicts.
Liu Mengjun, a Taiwanese economist and researcher from the First Research Division of Chung-Hua Institution for Economic Research, spoke with the Chinese-language Epoch Times in an exclusive interview on Feb. 6. He said that China’s economy did not suffer much from the 2003 SARS epidemic, because at that time China had just joined the World Trade Organization (WTO); and with a fairly low share in international trade, it managed to survive when the overseas market demand diminished during the SARS outbreak.
Domestic Consumption and Urbanization
Currently, China’s service industry accounts for a higher share of GDP than the industrial sector, including manufacturing and construction industries; and in the long run, China will have to make the transition toward a domestic demand driven economy, Liu said. But now, the coronavirus outbreak will have an impact on the country’s domestic consumption.
Urbanization, with tens of millions of people living in major cities, has also been an important factor driving China’s domestic demand, Liu noted. But it’s precisely the more urbanized regions that feel the greatest impact of the outbreak due to the lockdowns. The Wuhan coronavirus has thus also shaken China’s ambition to drive its economy through further urbanization.
Immobility of Workers, Transportation and Supply Chain Disruption
Liu pointed out that the lockdown has expanded to important cities like Wuhan, Hangzhou and Nanjing, which all have high concentrations of Taiwanese and foreign-funded companies and businesses. Those companies that rely on China as a processing and export base will feel the short term impact, he said. Eventually, a crisis of supply chain disruption will be felt when all manufacturers have exhausted their inventory due to immobility of labor and stagnation of transportation flows.
In addition, as these regions are mostly the “Made in China 2025” manufacturing and R&D bases, the spread of the coronavirus may cause a brain drain that further threatens China’s future economic prospects.
According to Liu, since the U.S.-China trade war began, some Taiwanese businesses, considering the increased tariffs and many uncertain factors, chose to return to Taiwan and restart their production lines there. Others moved production to ASEAN countries. With the spreading of coronavirus and the decline in China’s domestic demand, Taiwanese businesses that are still operating inside China will quickly look for alternative production bases.
Domestic Businesses Vulnerable Due to High Financial Leverage
Jia Guolong, chairman of Xibei Catering Group, a leading restaurant chain in China, said recently that the company’s funds may not last another three months if the coronavirus continues to spread.
Liu said it’s the norm in China that companies operate using high financial leverage, where huge amounts of money is borrowed. So the market downturn will pose more difficulties for those businesses with high leverage financing.
Even though the People’s Bank of China has cut its reserve requirements recently, it’s difficult for capital to flow to small and medium-sized firms that are in need of money, Liu said. It is estimated that a deluge of business failures would appear in China within one or two months, a testament to the vulnerability of China’s economy—it appears even better than other economies with a fair wind, but during an economic slowdown, the weakness of companies will be magnified.
Liu suggested that Taiwanese businesses should diversify both their investment and operations. It is still not practical for those who have businesses in mainland China to withdraw all their capital because the Chinese communist authorities will thwart their plans in various ways, he said. But it is feasible to adopt Japan’s overseas investing strategy called “China Plus One [other region],” namely, not putting all of one’s eggs in one basket.