The Week: China: the longer-term consequences of Covid-19

China may be seeing an economic bounce-back, but there may yet be economic consequences from the Covid-19 pandemic as the US sharpens its claws.

  • China’s economy looks set to stage a relatively speedy recovery from the crisis
  • The US is agitating for another trade war
  • The Chinese economy may be weakened as companies shift their supply chains

In many ways, China appears to have escaped lightly from the Coronavirus pandemic. Its lockdowns were relatively short-lived, its economy appears to be bouncing back and it did not see anything like the human toll of the West. However, there may yet be longer-term economic consequences for the world’s second largest economy.

Much has been made of the potential for global companies to move their supply chains away from China. For many companies, manufacturing in China appeared to be an easy way to cut costs, but more recently it has proved a logistical nightmare. Having spent much of the past two years wrestling with the US/China trade war and higher tariffs, companies have now had to face disruption from the Coronavirus. On balance, they may conclude that cheaper manufacturing is not worth the continued volatility of supply.

The question is whether companies will quickly forget their reservations when they discover the cost of reshoring. Equally, will it really matter for the Chinese economy as it becomes more focused on domestic consumption? China has a rising middle class with increasing spending power. It is innovating in areas such as technology and healthcare and this will progressively reduce the country’s reliance on manufacturing.

However, it cannot be immune from the international backlash following the Coronavirus. There appears to be an increasing decoupling of the US and Chinese economies. While this has mostly been a reduction of Chinese investment in the US rather than vice versa, it will affect Chinese economic growth over the longer-term. This in turn, may prove disruptive for the social fabric of China. If people feel their lives are getting better, they may accept autocracy more readily than if they feel the government hasn’t looked after their economic wellbeing.

This fragility might not matter were it not for the lofty valuations attached to many Chinese companies. Alibaba now attracts a higher weighting in the MSCI Emerging Market index than the whole of Latin America. Ten Cent is considered to be worth more than all of the European emerging markets put together. This looks anomalous.  

There will be growth areas. China is subject to the same social and technological shifts as the rest of the world. It will adopt ecommerce, expand financial inclusion, digitise. There will be opportunities within these shifts and they will be magnified because of the sheer size and might of China. However, it remains an area where investors should tread carefully.