As coronavirus spreads, international reluctance to depend exclusively on China is combining with the role played by the country’s tech giants in crisis management to produce a permanent shift in the Chinese economy, Lauren Johnston writes.
Coronavirus appears on track to become a pandemic. Schools are shut down not just in China, but also in Japan and Korea. The historical handshake is being replaced with a foot tap. The China-dominated global supply chain is under strain, and China’s February factory output reached a record low. On top of it all, the world’s facial mask manufacturing hub happens to sit in the eye of the storm, Wuhan.
It is unfortunate that at the onset of the virus, the world economy was already under strain. World output expanded by just 2.9 per cent in 2019, the slowest pace since 2008-09, and just 0.4 per cent above the 2.5 per cent threshold typically associated with a global recession.
Indeed, if it was not enough that 85 per cent of world economy must increasingly bear the weight of rapid population ageing combined with the lingering effects the Great Recession more than a decade ago, some fear the coronavirus may compound growth suppressants and instigate a much more lasting stagnation in coming years. There may, however, be a less obvious silver lining to the crisis.
For background, China makes for a study-worthy case in attempting to minimise the growth risks of population ageing. Most recently, in November 2019, the National Medium and Long-Term Plan to Actively Cope with Population Ageing was issued by China’s State Council. Aimed at meeting the challenges of population ageing, the plan captures key issues and proposes targeted policies and solutions for dealing with an ageing population while continuing the development of the economy.
Then, in January 2020, five central departments issued a notice titled ‘Guiding Opinions on Promoting the Development of the Aged Products Industry’. The document encourages all actors in the economy to be innovative and productive in sectors important to the elderly.
From mobility-related services to e-commerce and e-services, many products, tools, and technologies are especially useful for older users, and the document signals China’s intent to become a world leader in producing them.
These two prominent ageing-related announcements are part of a long-term strategy aimed to make the best of both economic and demographic change over time. Within economics, this is known as the economic demography transition, and China’s National Medium and Long-term Plan to Actively Cope with Population Ageing is an example of an economic demography transition strategy.
The logistics of China’s household, firm, and educational shutdown may in fact have opened a ‘black swan’ window that serves to speed up this economic direction. Not only, for example, have China’s e-commerce giants become indispensable to delivery of grocery supplies to the home-bound citizenry during the crisis, but also medical supplies. Alibaba, for instance, set up an online portal for persons to register shortfalls in their medical supply needs.
This combination provides a powerful and probably lasting precedent for how to support the needs of China’s rising population of medically vulnerable older citizenry.
Further, the shift to online education for university classes may also be selectively sustained after mobility bans are ended. Not only might this make education a little more accessible, but this may also have produced a dramatic turning point for online learning globally.
Meanwhile, challenges caused by the fact that the world’s dominant face mask-manufacturing hub, Wuhan, is also the heart of the coronavirus outbreak may awaken China and its partners to the risks of a ‘Middle Kingdom’ approach to economic globalisation.
On the one hand, scale efficiencies and environmental discounting have led China’s industrial production dominance. On the other hand, the geographic concentration risks of that dominance may have been underestimated. To this end, a long-term outcome of the virus might be greater dispersion of global supply chains, or at least some diversification of production. This, importantly, is one of the goals of the Belt and Road Initiative (BRI).
Whether such a supply chain re-balance works in China’s interests will depend on whether China’s nascent BRI hubs are effective in their goals. That is, can they catalyse broader investment?
Very recently, for example, Switzerland’s component manufacturing company TE Connectivity announced a new plant in Morocco. A related announcement cited both the China-US trade war and the newly realised need to overcome extreme reliance on one market, which happens to be China, given the effects of coronavirus on supply chains.
Such a shift could even line up nicely with the BRI, if investors ultimately utilise Chinese-invested infrastructure in the third markets they are turning to. Then, they could effectively complement, collaborate with, and compete with Chinese foreign investors as part of that.
The potential speed of such a transition in the global manufacturing supply chain, however, risks being disruptive for China. Chinese policymakers and entrepreneurs must be dexterous enough to utilise this opportunity to intensify the BRI and invest outside of China. In a similar vein, it is unknown how China’s current footing might be used to make challenging reforms at home that usefully modernise China’s economy.
Whatever the short and long-term effects of this virus, for better or worse, the scale of China’s global footprint has been newly communicated to the world. How China responds to this new visibility and accounts for its impact will contribute to the future of its place in the world.
All this said, it would be a shame if positive steps forward for the digital economy and third market investment are the only spill-overs of the outbreak. Toward minimising global health risks in future, more could also be expected of China and Chinese citizens to find ways to permanently implement basic health and other standards. China’s promise to ban consumption of wildlife is a step in this direction.
Ultimately, at the end of this nightmare perhaps lies a new chance for China to work with a wide variety of investors and policymakers in investing in new markets around the world – whether in relatively youth-filled Morocco, as in the case of TE Connectivity, or in face mask production beyond Wuhan, or further beyond again. The BRI offers a ready platform for those discussions.
The beneficiaries of this tragedy may be today’s developing countries that are most ready to grab a slice of a diversifying global supply chain. There may be gains to China also, not just in terms of a leap forward in tech solutions, but also if the outbreak can help tackle dismissiveness of high-income country policy norms. Time will tell if the country can utilise this incredible tragedy to spark such boldness in its economic opening and reform agenda.