How have China’s bold measures to contain COVID-19 impacted the economy?
Latest indications suggest the Chinese government’s bold steps to contain COVID-19 have taken effect, with far fewer new cases reported daily. But what impact have these strong measures had on China’s economy? Angela Chen from our Shanghai office traces the contagion’s background and evolution and, with 80% of the country’s businesses back in operation and schools set to reopen soon, looks at the likely timescales for a reversal of the economic consequences.
2019 was a troubled time for China, as its trade war with the United States affected the country’s economy and the mass protests in Hong Kong created some tension with the central government. But the coronavirus outbreak that began at the start of 2020 has completely overshadowed these earlier events and is likely to have a much graver and more enduring impact on both China and the rest of the world. It goes without saying that this holds true for all M&A activity into and out of China as well.
Some background on the outbreak
Since the contagion first began in January, the Chinese government has taken a series of increasingly bold steps to contain the epidemic, and the latest indications are that these are working. As of 8 March, fewer than 200 new cases of COVID-19 (now the official name of the coronavirus) were being reported daily — down from a peak of 4,000. These containment measures, however, also significantly impaired China’s economy during the first quarter — although the slowdown is now abating. By the end of February, work at 80% of all businesses had resumed, and schools are expected to reopen in April.
Measures taken by the Chinese government and the growth of new coronavirus cases
With more countries restricting travel and the shipment of goods, globalization has been thrown into reverse. Instead of greater integration, the world economy is becoming more fragmented and many companies in many countries are confronting supply-chain challenges.
If, as hoped, the Chinese government can fully contain the outbreak within a six-month period, then we expect demand to rebound and the virus’ negative economic consequences to be reversed the following year. Such a scenario would be similar to what took place in the wake of the 2003 SARS outbreak. The consensus view is that fallout from the contagion will reduce China’s gross domestic product (GDP) growth by around 2% for the first quarter and 0.5% for all of 2020.
These projections, however, are based on Chinese market conditions and could be upended by international developments. It is the global scope of the outbreak that makes the situation so difficult to predict. Since the first case of COVID-19 was confirmed in Thailand on 14 January, as of 11 March the total number of cases outside of China has grown to 125,815, and its spread in many countries is still accelerating. And given that the response of these countries and the containment measures taken by their governments is sure to differ from China’s blunt and sweeping actions, it is impossible to know at this time just how effective they will be.
The economic impact in China and the government's response
Companies and industries have experienced disruption in China, too. The coronavirus outbreak has put significant pressure on the wholesale, retail, hotel, restaurant, travel and entertainment sectors — industries that accounted for 54% of China’s GDP and 60% of its GDP growth in 2019. The supply side of China’s economy, including manufacturing and real estate, has been thrown into disarray as well.
But not all the news is so grim. The health crisis has also generated opportunities for online businesses, including online education (Tencent Class, NetEase Cloud Classroom), online conference systems (Zoom, DingTalk under Alibaba) and online shopping (Freshippo under Alibaba, MissFresh). The healthcare industry — and especially the medical consumables sector (Uvex green shield masks) — has also benefitted from the increased demand for masks, protective goggles and body suits. So have testing and pharmaceutical companies, which are receiving strong support from the government. More generally, the crisis has led most industries to restructure, forcing out some smaller players, while the bigger and more entrenched players, along with some new market entrants, have gained market share.
To support the economy, the Chinese government has indicated it will relax its fiscal policies for the remainder of the year, and the People’s Bank of China has signaled that it may drop its base interest rate for the first time in 12 years. China’s central bank has also announced a series of policy changes aimed at increasing lines of credit and lowering financing costs. These include:
- dropping the one-year loan prime rate (LPR) by 10 basis points to 4.05% and the five-year LPR by five basis points to 4.75%
- injecting US$174 billion worth of liquidity into the financial markets via reverse repo operations
- earmarking US$43.17 billion in funds to support major national banks and some local corporate banks.
Government and private sector investment — which represented 31.2% of GDP growth in 2019 — is expected to play an even bigger role in 2020. Much of it will center on the “new form of infrastructure,” including 5G stations, smart-city and public facilities, as well as urban redevelopment.
How will this impact M&A activity?
Given the global economic slowdown, our expectation is that outbound investment will continue to decline. The exceptions will be large, cash-rich companies seeking to mitigate the disruptions caused by the outbreak and adapt to new industrial patterns. These companies — some of which are also looking to reduce their production costs by shifting portions of their operations from China to lowercost regions — are still eagerly searching out new opportunities abroad. But even as outbound investment slows, interest in inbound acquisitions continues to grow on the part of foreign multinationals hoping to expand their Chinese presence.
Drawn by the allure of the world’s biggest population and its huge and growing consumer market, these companies recognize that business conditions in China are maturing and increasingly favorable for international investors. Anticipating a rebound, many of them are preparing to hit the ground running as soon as the crisis abates. This, however, is not a one-way street. Driven by heightened local competition and the rising cost of labor, there are also numerous international players that have been active in China for years but are now seeking to exit the market.
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