Coronavirus: concerns for growth and jobs in China

Text by: Agnieszka Kumor

China has had its worst nightmare in almost 30 years. The country's GDP collapsed by 6.8% in the 1st quarter as the Covid-19 epidemic paralyzed production, services and consumption. An unprecedented brake that will not have consequences for the rest of the world.

Publicity

Although questionable, China's GDP figure is still closely scrutinized, given the country's weight in the global economy. This time, it was indeed the worst performance since the start of quarterly GDP publications by China in the early 1990s. Many analysts assume that the real contraction in the 1st quarter could prove to be much more stronger than what the official figures suggest. 

The political use of statistics

Since the reforms of the 1980s and 1990s, China has greatly improved its data collection methods thanks to the establishment of statistical services, in particular with the help of INSEE and the World Bank. Problem: Beijing uses the statistics that suit it. “ In China there is a political use of figures. This does not necessarily mean that the central government does not have good statistics. But that these figures are not necessarily disseminated, "says Mary-Françoise Renard, professor of economics at Clermont Auvergne University (UCA) and head of the China Economic Research Institute at CERDI.

At the same time, the political careers of provincial governors depend on their close ties to the Chinese Communist Party (CCP) and on how they apply the instructions of the central government. “  And the Beijing directive is precisely not to blacken the picture and to minimize the impact of the coronavirus on growth. We must show the positive side of this crisis,  ”notes Mary-Françoise Renard. For this specialist in China, beyond the figures, we must consider what they represent. 

Small and medium-sized enterprises at risk

As for the effects of Covid-19 on its economy, China is by no means out of the woods. Business is struggling to restart across the country and many businesses are at risk of failure. No less than 460,000 of them shut down in the first quarter of this year. Their situation has been getting worse lately, the coronavirus was the final blow.

For more than a year, Chinese SMEs have been paying the price for the trade war between China and the United States, recalls Julien Marcilly, chief economist at Coface. “ Because of these tensions, the risks have risen a lot for these companies, especially those in construction or metallurgy. To this must be added companies whose activities are related to household consumption or electronics. The latter have also suffered from protectionist measures put in place by the United States government. To all this is now added the systemic shock represented by the coronavirus crisis with very many plant closings. Of course, since the beginning of March, the factories have reopened gradually. But it will take much longer for them to start producing again as before, ”he believes.

Pressure on banks

To mitigate the consequences of the coronavirus pandemic on the country's economy, Beijing has decided to go, on the one hand, by increasing budgetary expenditure in order to finance in particular large regional projects, and on the other , through monetary policy. 

In order to implement the fiscal stimulus, the Chinese state will have to take on more debt. And he intends to do so especially with local banks. On the monetary side, the Chinese Central Bank has started to adjust a number of instruments and will continue to do so, without going as far as the US Federal Reserve and its huge stimulus package. With this in mind, the People's Bank of China (PCB) lowered a medium-term interest rate and reduced the amount of reserves that commercial banks must hold with it. The purpose of the maneuver is to make local banks inclined to lend more, but also to invite them to be lenient towards businesses or households that will find it difficult to repay their loans. 

Most of these stimulus measures go through small local banks with the risk of putting them under pressure. Because through them, the whole Chinese banking system is at stake. Why? Julien Marcilly explains it: “  the large public banks, which are rather in good health, now represent only 40% of the banking sector in China. All the rest are these small commercial banks scattered in the different provinces, and whose financial situation is not always clear. The risk is that one of these banks is in a bad patch and that this will cause panic among savers who will start to withdraw their money immediately . " 

If this should happen, the Chinese state would have to play firefighters by drawing on its foreign exchange reserves in order to recapitalize the banks. At the end of December 2019, China's foreign exchange reserves amounted to $ 3.11 trillion. 

The nerve of this war, employment

A possible rebound in the Chinese economy next year cannot be ruled out. But the path leading to it will be long and the key element of this recovery will be employment, warns Mary-Françoise Renard. These small and medium-sized enterprises, which were mentioned above and which are so fragile, are also the most dynamic in terms of employment.

The unemployment rate remained high in March (5.9%) after reaching its historically high level in February (6.2%). It drops a bit because activity is gradually picking up. But what official figure does this reality reflect? " The unemployment benefit is very low in China and the procedures are complicated, " says Mary-Françoise Renard. “ As a result, many Chinese people do not declare themselves unemployed. " 

Unemployment threatens the country's social stability in the eyes of the Chinese authorities. “ It is imperative for the government to maintain employment. And among the measures taken vis-à-vis SMEs, the objective is clearly to reduce unemployment so as not to lead to protests from the population and social movements, "said the professor at Clermont Auvergne University. 

The impact on Europe and the United States

China is the second largest economic power in the world. The dramatic slowdown in its growth will not be without consequences for the rest of the world. Difficult to make short-term forecasts, we can however wonder about the medium and long term. In this perspective, the European Union and the United States must imperatively review their industrial policies to put an end to the dependence of their production chains on China. The health sector has become highly sensitive with vaccines, drugs, mask equipment, etc.

A new strategy for Africa?

Increasingly dependent on the Asian giant, emerging economies, and in particular African countries, are worried about the slowdown in Chinese growth. Some of these countries are considering revising their relations with Beijing. First there is the question of debt. Recently, major public creditors have accepted a moratorium for 76 countries, including 40 African countries. A postponement, failing a cancellation of the total debt of the continent estimated at 365 billion dollars, 40% of which is held by China.

It is also a question of exchanges marked by a strong imbalance. This makes the continent particularly vulnerable, say experts. “ China advocates for multilateralism, but continues to defend its interests in Africa. Also, this coronavirus crisis could be an opportunity for African officials to reflect on a new strategy to adopt vis-à-vis China ”, concludes Mary-Françoise Renard.

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• Coronavirus