Testing times

Countries should come together and coordinate and collaborate to safeguard the global value chain

The novel coronavirus will not alter the long-term trajectory nor the fundamentals of the Chinese economy. However, different from the severe acute respiratory syndrome (SARS) outbreak of 2002-03, the new coronavirus broke out at a time when the Chinese economy was already caught in the double whammy of the China-US trade war and a downward macro cycle, both of which mean that the current epidemic may have a greater impact on the Chinese economy than the SARS did.

On Jan 31, the World Health Organization declared the novel coronavirus outbreak a public health emergency of international concern (PHEIC). The declaration of a PHEIC is reviewed every three months, at which point it automatically expires if it is not extended for a period of up to six months. If the PHEIC expires in the near future, it means that the prevention and control measures undertaken have been effective and that the epidemic has been largely brought under control, which can facilitate the recovery of the Chinese export sector. Otherwise, businesses will have a harder time finding and sourcing goods for exports, and cross-border trade will come under threat if supply lags behind demand or if the costs of production and logistics spike.

The epidemic has also triggered chain reactions, and in some cases even a domino effect, across the global supply chain. The latest data show that the top four provinces in China by the number of confirmed cases (accounting for 75 percent of all confirmed cases nationwide), namely Hubei (64 percent), Zhejiang (4 percent), Guangdong (4 percent) and Henan (3 percent), are all manufacturing and trade hubs, where most of the Chinese and global automobile, healthcare, pharmaceutical, biotech, chemical engineering, communications and machinery companies are concentrated. According to data from the United Nations Conference on Trade and Development, China is the world's largest exporter of electrical and electronic components, accounting for 30 percent of the category's global export value. Complete and partial lockdowns throughout the country have restricted transportation on critical road networks, airways and sea routes. The global manufacturing sector will see production significantly affected in the near term.

Currently, China is at a critical stage in its epidemic prevention and control work. This outbreak will make everyone more aware of the fact that the world can prosper only when China, a key link in the global supply chain and a major source of demand, does well. Data show that 41 out of Apple's 220 major suppliers are located in China, four more than the number of suppliers on its own soil. China also plays a key role in global smartphone production. According to reports released by Strategy Analytics, 70 percent of smartphones used in the world are made in China. Therefore, the entire industry will see an enormous impact due to the epidemic.

As the largest trader in intermediate goods and the largest trading partner of over 120 countries in the world, China is not only a hub and node in the global manufacturing supply chain network, but also one of the markets with the greatest potential. China has been the world's second-largest importer for 11 consecutive years, importing over 10 percent of the global total value. Using its China-World Exposure Index, the McKinsey Global Institute has identified a growing global dependence on the Chinese economy. In light of that, the epidemic has not only had a considerable effect on the Chinese economy but also sent shock waves through the world economy and the global supply chain.

According to World Bank statistics, in the 17 years since the SARS outbreak, China's GDP has grown eightfold from $1.7 trillion to nearly $14 trillion. And China's share of global trade has more than doubled, from 5.3 percent in 2003 to 12.8 percent last year. China plays an even bigger role in Asia, a region closely intertwined with China in terms of trade and production networks. In the East Asia supply chain, China is the last link in the highly integrated production chain for Japan and the Republic of Korea. Both the Japanese and ROK economies are heavily dependent upon exports to China. For example, trade with China accounts for 22 percent of Japan's foreign trade, a share much higher than its trade with the United States, which accounts for 15 percent.

Views on a possible end date of the epidemic and its impact on the Chinese and global economy diverge. Kristalina Georgieva, the managing director of the International Monetary Fund, says that China is likely to see a V-shaped recovery once the epidemic ends, while the global economy will be minimally impacted. Joseph Lupton, senior global economist at JPMorgan Chase, believes that the epidemic will peak in the second quarter based on the evolution of past epidemics. He projects the global economy to shrink by 0.3 percentage points in the first quarter, down to an annualized growth rate of 2.3 percent before rebounding in the following quarter. While Ana Boata, head of macroeconomic research at Allianz Research, believes that the epidemic could push the global manufacturing sector into a slump during the first half of 2020 as a result of repercussions from the Chinese economy.

The top priority now is to win the battle against the novel coronavirus. The sooner we can put a stop to it, the smaller its impact will be. We must safeguard supply chain safety, and facilitate the recovery of key production manufacturing capabilities in an orderly manner as soon as it is safe to do so, ensuring the supply chain safety of raw materials and the production of core components.