Post-COVID-19 Chinese Economy and Push for Localization

As we enter into the last quarter of 2020, by all counts, the COVID-19 pandemic has taken toll on nearly all the economies of the world. Furthermore, the growth recovery in most cases is expected to be a ‘V’ shaped curve. A number of financial institutions have predicted that the global economy will continue to be ‘stressed’ well into the next year. However, the silver lining is that the global economy is expected to recover (for some) to pre-pandemic levels by the first quarter of 2021 and for the US in the second quarter of 2021.

In the case of China, it is already on its way to recovery. After recording impressive growth for the last three decades,and 6 percent growth in 2019, the Chinese economy contracted for the first time by 6.8 percent in the first three months of 2020. Among the many sectors of the Chinese economy that were worst hit by COVID-19 was the domestic consumption. The COVID-induced stringent lockdown regime announced by the Chinese authorities resulted in people choosing to “save than spend”. Besides many manufacturing units were shut down as precautionary measures against the spread of the virus, and large number of people had also returned to home towns in rural areas either due to lack of work or to escape the pandemic. This had direct impact on the retail sector which reached its “lowest point, a 20.5 percent year-on-year drop, in January”. However, it has improved in successive months, and in May a decline of only 2.8 percent (year-on-year) was recorded.

Chinese exports have continued not with standing President Donald Trump’s punitive duties since 2018. The Chinese leadership had made attempts to come to a settlement with the US over imports (agreed to buy more US goods worth $200 billion) but to no avail. This prompted the Chinese leadership to direct the conglomerates to explore other markets in Asia, Europe and Africa. In January and February 2020, China’s exports “contracted by 17.2 per cent in dollar terms” and “imports fell by 4 per cent”. It was not surprising that China recoded a “trade deficit of $7.1bn in the first two months of the year”.

By August, the exports had surged compared to the early months of the 2020 and this was due to a number of factors such as robust control measures against the pandemic and governments’ economic support policies. For instance, it was reported in September that “exports rose 9.5% over a year earlier to $235.2 billion, up from July’s 7.2% growth” and “imports declined 2.1% to $176.3 billion, compared with the previous month’s 1.4% contraction”.However, “China’s export outlook may continue to face headwinds from recurrent waves of COVID-19 in overseas markets,” but given that the “internal cycle is running, now China is waiting for the external cycle to come back. Before that, China has to rely on its own internal cycle.”

While the pandemic impacted the Chinese economy is more than one ways and numerous sectors were affected, the technology sector merits attention. The Chinese demand for foreign technology has been high for several years now and the government announced a slew of policies for technological development at home and capability buildup to compete with the more advanced economies. China’s BAT technology companies (Baidu, Alibaba and Tencent) have had mixed fortunes in 2019 due to the US-China trade war.

Chinese company Huawei has been in the cross-hair of US’ Entity list which has impacted its reputation across the globe. Numerous western and Asian countries have decided not to engage Huawei in their national telecom sector, particularly the 5G technology, and decided to develop the technology indigenously or through partnership. For instance, India and Japan have decided to develop 5G technology with support from the US, Australia and Israel.

Besides, China chip requirementsthat aremajorly sourced from the US(nearly 95% of Chinese servers use CPUs from Intel) have run into difficulty. Also,US’ “Clean Network” initiative eliminates Chinese technology firms and have been labelled as threatening national security. China is conscious of these challenges and President Xi Jinping has on “multiple occasions described China’s reliance on imported technology with the term Qia Bozi, which translates to being strangled by an adversary”. This, along with US technology denial pressures have triggered a localization push with gains in local market share.

Be that as it may, according to “Fitch Ratings Global Economic Outlook” released in early September, Chinese economy has recuperated and is fast recovering towards the pre-virus level of GDPand this should result in positive spillovers for the global economy.

Dr. Vijay Sakhuja is associated with the Kalinga International Foundation, New Delhi.

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