Coronavirus: Reopening and the Economic Aftermath

On April 8, the Chinese government lifted a 76-day lockdown of the city of Wuhan, the capital of Hubei province and the epicenter of China’s coronavirus outbreak. The move was the last in a series of steps the Chinese Communist Party (CCP) has taken since February to reopen the country and its economy, including most of the Hubei province on March 25.

The moves are, of course, welcome developments for the citizens of Hubei and Wuhan, many of whom have not ventured outside, much less traveled outside of Wuhan, since the lockdown began on January 23.

China’s reopening has come with strings attached, especially in Wuhan, where approximately two-thirds of China’s nearly 84,000 reported cases were located. Restrictions on movement remain. Individuals in Wuhan still must have their temperatures checked before entering any building and there are guidelines for keeping appropriate distances on elevators and in subway trains.

Moreover, individuals are still required to carry an app on their cell phone that provides a stop-light system for identifying risk of transmission. Every individual has a QR code that equates to a green (safe), yellow (at risk) or red (infected or at extreme risk) rating based on where one lives and movements within the city. Only individuals with a green code can leave the city while individuals living in apartment blocks with infected or at-risk individuals are quarantined.

The virus and the damage: China’s “drawn out” recovery

The virus’ human and economic toll have been significant. On April 16, Wuhan authorities revised its previously stated death toll from the virus by 50%, adding 1,290 deaths, bringing the total to 3,869. This number is almost certainly a massive undercounting. Reports in early April estimated the death toll in Wuhan was at over 40,000 based on the number of urns that were shipped to eight funeral homes in Wuhan. One picture published by Caixin Global showed 3,500 urns stacked on the ground inside one of these funeral homes, though it was not clear if all urns contained remains.

In addition to the terrible human costs, China’s coronavirus outbreak has generated extensive economic damage. On April 17, China’s National Bureau of Statistics announced that the Chinese economy contracted in the first quarter of 2020 by 6.8%. It was the first time China’s economy had suffered a quarterly decline since 1992. China had recorded 6.0% growth in Q4 2019, a number that was, at the time, considered the signal of a slowing economy.

Estimates of China’s overall 2020 growth vary, though the International Monetary Fund forecasts only 1.2% growth for this year, a figure that could amplify existing societal and political challenges for the CCP and President Xi. Moreover, the effects of the rapid spread of the coronavirus in January and February will not be confined to 2020. “The GDP contraction from January to March will translate into permanent income losses, reflected in bankruptcies across small companies and job losses,” according to Yue Se, an analyst with the Economist Intelligence Unit.

China’s reopening has been designed to remedy these challenges and mitigate both short and long-term economic risks. However initial results indicate that their recovering throughout reopening will be “a drawn out” one.

Of course, factories and individuals are going back to work. FedEx noted in March that about two-thirds of China’s manufacturing base was back to work with around 90-95% of large manufacturers operating. Wu Haishan, a vice president at digital bank WeBank, which has analysed mobile phone geolocation to determine economic and social activity in China, estimates that between the early stages of the opening process that began on February 10 to mid-March, about 80% “of original economic activity” had restarted.

Even as economic activity starts back up, apprehension over the potential — many would say likelihood — of a second outbreak are having a material effect on China’s economic recovery. The combination of continued social distancing measures and the need to regularly disinfect equipment are creating constraints on operations.

As affecting as these constraints are, the main challenges China’s economy faces are not necessarily on the supply side. Domestic demand has decreased dramatically and possibly persistently. Combined monthly retail sales in January and February dropped 20.5% from the same months a year earlier, a particularly affecting development in an economy in which 60% of economic activity is in services, according to McKinsey and Co.

This drop in demand is due first to the economic uncertainty, especially among China’s growing number of unemployed.

The National Bureau of Statistics announced that the unemployment rate inJanuary and February was 6.2%, the highest rate ever recorded, and still a likely underestimation of the true nature of the problem.

China’s drop in demand is also the result of less tangible psychological and behavioral factors. People in Wuhan and across China are worried about the potential of a second round of infections and have, in many cases, adjusted their behavior.

One Wuhan restauranteur noted that he has had to shutter several restaurants, due to the combined stresses of keeping employees safe and “a significant downturn in demand.”

The reduction of demand has also hit China’s consumer credit markets, causing what Richard Xu, an analyst with Morgan Stanley, called “China’s first credit demand disruption in history.”

Demand for Chinese exports have also fallen off sharply as the rest of the world, including most of China’s main export markets cope with their own coronavirus outbreaks and the economic impacts of social distancing and stay-at- home orders. The U.S-China Economic and Security Review Commission assessed in an April 21 report that “Labor shortages caused a significant decline in production and export shipments. Industrial output plummeted, and recent data indicate a manufacturing contraction in February 2020 below the lowest figure seen in the 2008 financial crisis.”

Long-term economic risks of reshoring

The coronavirus outbreak – and China’s role in facilitating its global spread and exacerbating its effects — has also accelerated and intensified pre-existing unease about China’s central role in the global supply chain and the economic and geopolitical vulnerability associated with this reliance. Many countries, notably the U.S. and Japan, are using the coronavirus crisis as a catalyst for moving critical supply chain nodes out of China. These moves will have long-term and strategic implications for China’s economy.

In a March 31 phone call with G-20 trade ministers, U.S. Trade Representative Robert Lighthizer stressed that a key lesson of the pandemic is “that over-dependence on other countries [China] as a source of cheap medical products has created a strategic vulnerability to our economy.”

Japan has taken their efforts at reshoring a step further. Prime Minister Shinzo Abe has initiated a program he referred to as the “shift away from China” policy, designed to move Japan’s critical supply chains out of China and back to Japan or to Southeast Asia. According to Abe, “[Japan] should try to relocate high value-added items to Japan. And for everything else, we should diversify to countries like those in ASEAN.”

And this interest in reshoring is not merely notional. Japan’s government has taken concrete steps to begin the process of bringing critical industry back to Japan or to other low-cost locations outside of China. On April 7, the Japanese government adopted an emergency economic package that included 240 billion yen (about $2.2 billion) dedicated to supported Japanese companies moving production out of China. On April 21, Nikkei Asian Review reported that Japanese Iris Ohyama, which manufactures face masks at plants in the Chinese cities of Dalian and Suzhou, will become the first Japanese company to receive a subsidy as part of this program. The company will start producing masks in Japan starting in June 2020.

China is clearly concerned about the challenges that moves to reshore critical supply chains holds for the future of its economy. During an April 8 meeting of China’s Politburo Standing Committee, President Xi commented that “as the pandemic continues its global spread. . . unstable and uncertain factors are notably increasing.” He also encouraged the government and Chinese citizens to keep “preparedness in mind and work to cope with prolonged external environment changes.”

Vectors of concern: overlooked, imported and asymptomatic cases

Anxiety over a second wave of infections is not unfounded. Indeed, some countries that were touted as leading examples of how to deal with the pandemic’s first wave of infection are now dealing with new challenges resulting from three main vectors of contagion.

Singapore’s story is especially cautionary. At the height of the first wave, Singapore was able to keep total number of infections at an exceptionally low level without having to implement a Wuhan – style lockdown or extreme social distancing measures. It relied on a test and track method and on hospitalizing those that were asymptomatic until they tested negative. This approach benefitted from Singapore’s relatively small size, its ability to control its borders effectively, its advanced medical system and a political culture of strong government control of society.

According to John’s Hopkins University’s coronavirus tracking map, on March 17, Singapore had only 266 confirmed cases. By April 18, that number had ballooned to 6,000. On April 22, there were more than 10,000 confirmed cases. The main transmission network for this second wave of infections has been Singapore’s migrant worker community already living in the country, which is estimated between 200,000 to 320,000. These communities are frequently housed in large dormitories in which several individuals share a room creating ideal conditions for contagion, especially in a country that until early April had not instituted aggressive social distancing measures.

Approximately 8,000 of Singapore’s 10,000-plus cases are linked to this community, which was largely overlooked in the government’s initial virus tracking efforts. Singapore has now instituted more aggressive social distancing measures to include closing schools and non-essential businesses.

While these cases were among migrant communities already in Singapore, there is also growing concern in China and across the region about “imported” cases as states and societies open-up to the outside world.

In Taiwan — another frequently cited example of how early and aggressive action was able to prevent a community spread of the disease — there has been a relative spike in cases since mid-March, largely attributed to “imported” cases. On March 17, Taiwan had only 77 confirmed cases. On April 22, the number was up to 422—still, much lower than most major industrialized nations. Of these cases, the government claims that 343 are imported, including two individuals identified on April 22 who had just returned from studying in North America.

Taiwan’s 422 cases also include a second category of imported cases. Twenty-four members of Taiwan’s Navy have tested positive for the virus after returning from a “Fleet of Friendship” goodwill mission to Palau. Taiwan’s Central Epidemic Command Center (CECC) reported on April 21 that it had sent a text message alert to roughly 200,000 people whose cell phone data showed they had been in the same location as the infected military personnel for 15 minutes or more during the period April 15-18.

Asymptomatic carriers constitute a third potential vector for a second wave of infections that could come after economic opening up. This is a particularly prominent issue in China. A March 23 story from the South China Morning Post revealed for the first time that 43,000 individuals tested positive for coronavirus in China through February without showing symptoms. These 43,000 positive tests have not been included in China’s official count, which currently stands at just under 84,000. So, roughly one-third of all cases in China were asymptomatic, a figure that reinforces the need for continued frequent and aggressive testing.

The CCP has taken several steps to attempt to both understand and address the threat from these “silent carriers.” Most notably, Li Keqiang, China’s Premier and second most powerful political figure in China, has openly called for accurate reporting of coronavirus infections and the end of the practice of reporting artificially low numbers to gain political favor.

According to Li, “There must not be any cover-up or underreporting just for the sake of keeping the number of new cases at zero. All subnational governments must release epidemic information in a fact-based, open and transparent manner.” As a result of this push for increased transparency, at the start of April, China began to report asymptomatic cases — though it is not adjusting its overall total to account for previously identified asymptomatic cases.

In late April, Chinese authorities announced a large study to better understand the scale of asymptomatic infection in order to, in the words of one molecular biologist associated with the project, “help us to direct our countermeasures in the future.”

The intersection of these three enduring transmission vectors means that, as a Chinese National Health Commission spokesperson noted, even as the situation in China has eased enough to begin to open society and the economy, “the possibility of a new round of infections remains relatively high.”

As a result, China, Singapore, and Taiwan are all either instituting or continuing with social distancing measures and with monitoring of the movement of at risk and infected individuals, including through electronic means. Hong Kong, which recorded zero new cases of the virus on April 20, is actually extended social distancing measures as well. These social distancing measures are prudent, but they also will dampen demand and create constraints on production, efficiency, and transportation as these economies seek to get back to scale.

As state governors and the federal government in the U.S. develop an approach for reopening economic and social activity in the coming weeks, it is clear that there will be difficult trade-offs between balancing pressing and persistent public health priorities with economic and societal exigencies.

However, these leaders have the benefit of examining the experiences of states and cities in Asia that are ahead of the U.S. in attempting to emerge from the public health, psychological, emotional and economic trauma of the original coronavirus outbreak. Of course, local conditions here and in these states do matter and the experiences of China, Taiwan, Singapore, and Hong Kong will not serve as exact analogues for the U.S. Still, decision-makers should heed the commonalities and key lessons learned from those experiences and build strategies that account for a gradual return to work and economic scale, changed social and consumer behaviors, and, most importantly, continued vigilance in containing the virus’ spread.

 

Tate Nurkin Founder and CEO
OTH Intelligence Group