Why China matters so much pre and post lockdown

Why China matters so much pre and post lockdown

Written by The Investor

10 March, 2020

Why China matters so much pre and post lockdown

For the rest of the world, China matters as a source of demand, a source of supply, and a focus of concern for financial markets:

  • In 2019, China imports came in at $2.1 trillion. Sales in China are a major earner for multinationals. And Chinese tourists staying home hits everyone including themselves as tourism represent 11% of Chinese GDP.
  • China is the world’s biggest producer of manufactured components. When Chinese factories shut down the parts go missing.
  • If China can quickly get the outbreak under control, and the world’s factory comes online in the second quarter, then the impact on the rest of the global economy could be contained.

Why China matters so much pre and post lockdown

A survey by Made-in-China.com—one of the main platforms connecting Chinese suppliers and global buyers—found that by late February, 80% of manufacturing firms had resumed operations. By late April, says general manager Li Lei, production capacity should be back to normal, according to Bloomberg.

 

But the rest of world is now shutting down and reducing orders

 But will there be demand for Chinese made products in March and April 2020? Bloomberg highlights a lighting company based in China’s Zhejiang province and how their problem is changing shape. The firm has more or less overcome the domestic shock: All workers are now back at the factory. But now they’re preparing to face a different problem: Weaker orders from overseas.

Goldman Sachs expects a global contraction in the first half of the year. Recent forecasts polled by Bloomberg for first-quarter GDP growth in China range from 5.8% all the way down to -0.5%.

Clearly no one really knows.

A 2006 paper by the World Bank put the potential cost of a severe flu pandemic at 4.8% of global GDP—a tailspin that would rival that seen in 2009 after the financial crisis.  Reports are that WHO are close to calling Covid-19 a pandemic.

Add to the equation the world’s historically low level of interest rates and high levels of debt.  Right now a do nothing strategy is an error.   The world needs lower interest rates and central bank intervention to encourage funds flow into the economy.

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