22/04/2020
Julia Absolon, an Honours student at IBS decided to explore the effect of the current pandemic on the largest world economies and is currently writing a series of interesting articles: COVID-19 and its Impact on Financial Markets.
Julia finished the 1st part of her series recently, entitled: "China, Where it all began..." Have a good read!
“In the past, the government might have let some companies go to the wall to help industry restructuring, but it’s now got to the point where employment, stability and getting the economy going again comes first” (Mitchell, Shepherd, & Ju, 2020).
How did the outbreak of COVID-19 impact the financial market in China? For decades, China has been a global leader in the consumption and production of large quantities of goods and services with an average economic growth of 9% per year. The GDP was enormously affected by the outbreak of the virus, falling to an all-time low of -6.8%. The decline in GDP led to bankruptcies of small companies and high unemployment of 6.2%., compared with 3.8% in 2019. Due to the lockdown, retail sales dropped by 15.8% last month (BBC News, 2020). The fact that services and consumption account for more than 50% of China’s GDP shows that fluctuations have an intense impact on the economy. China is highly dependent on the demand of exports to trading partners, such as the United States. Since many of China’s trading partners are severely affected by the pandemic, domestic demand is suffering most. During the Chinese New Year, the revenue has dropped considerably. Only $3.9 million was generated this year, compared to $1.5 billion in 2019. Since last month, many firms which create more than 10 million jobs annually returned to work. Although sufficient labour is available, new orders from abroad fail to appear. On March 1, China’s central bank announced that it will accept delayed debt and interest payments from the first half of the year to minimize the risk of bankruptcy. Discounted government loans are offered as well (Mitchell, Shepherd, & Ju, 2020). One might think that the stock market has also suffered greatly from the pandemic. However, the CSI 300 index has only fallen by 10%, compared to almost 20% of the S&P 500 on Wall Street. One reason is that the interest in the rapidly growing biotechnology and pharmaceutical industry in China increased considerably during the pandemic. Another reason is that the government implemented efficient measures to guarantee market liquidity (Lockett, 2020).
Photo by chuttersnap on Unsplash
References
BBC News. (2020, April 17). China's virus-hit economy shrinks for first time in decades. Retrieved from BBC News: https://www.bbc.com/news/business-52319936
BBC News. (2020, February 4). Coronavirus: China admits 'shortcomings and deficiencies'. Retrieved from BBC News: https://www.bbc.com/news/world-asia-china-51362336
BBC News. (2020, April 17). Coronavirus: China outbreak city Wuhan raises death toll by 50%. Retrieved from BBC News: https://www.bbc.com/news/world-asia-china-52321529
Lockett, H. (2020, April 1). China defies coronavirus to top global listings in first quarter. Retrieved from Financial Times: https://www.ft.com/content/a4d3e125-2043-409b-8318-0f536ecb2ca5
Mitchell, T., Shepherd, C., & Ju, S. F. (2020, March 10). Coronavirus: China's risky plan to revive the economy. Retrieved from The Financial Times: https://www.ft.com/content/396def8e-5d82-11ea-8033-fa40a0d65a98
Shane, D. (2019, April 17). China's economy had a steady start to 2019. Retrieved from CNN Business: https://edition.cnn.com/2019/04/17/intl_business/chinese-gdp-q1-2019/index.html