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Economies intend to move Businesses Out: China to take a hit 

  • May 17, 2020 12:35 AM AEST
  • Kunal Sawhney
    CEO Kunal Sawhney
    2299 Posts

    Kunal Sawhney is founder & CEO at Kalkine and is a richly experienced and accomplished financial professional with a wealth of knowledge in the Australian Equities Market. Kunal obtained a Master of Business Administration degree from University of T...

Economies intend to move Businesses Out: China to take a hit 

While the global economy is still struggling with the adverse effects of coronavirus, China being the first country to grapple with COVID-19 crisis has successfully overcome it.

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After months of lockdown, China is slowly restarting its economy. Still, it continues to face significant challenges in its economic recovery as the pandemic has spread globally, affecting its trade relations. Post Coronavirus, China has been on the frontline of economic recovery and the societal changes the pandemic has triggered.

The country’s first-quarter GDP declined by 6.8% over the previous year, contracting for the first time since at least 1992 amid lockdown and shutting down of all businesses and trade. Weak industrial demand, cancellation of orders, diving imports and a collapse in exports were some of the economic challenges the country is going through as coronavirus spread all over the world.

However, the economic activities began to normalise during April as the country returned to work and data on industrial output, investment and retail sales showed some improvements. Nonetheless, economic recovery is still challenged by increasing unemployment that, in turn, affects consumer spending, collapsing external demand and uncertainties from the global spread of the virus.

US and China spat

The US is deeply dependent on China for medical supplies, auto, pharmaceutical and tech products. At the same time, China looks up to the US as a source of raw materials, energy and agricultural products for the production of consumer and industrial goods.

The US now has sensed the rising economic threat in future from China and is considering to reduced dependence on China for strategic goods and supply chains. The advent of coronavirus has made it more evident, including US-China trade war that US, EU and other countries with similar mindset must diversify supply chains away from China.

The US is in plans to form ‘Economic Prosperity Network’ that will include a group of partners like Japan, India, Vietnam, South Korea and New Zealand who will work based on similar criterions from energy, digital business, education, infrastructure and commerce. This initiative is taken up due to massive loss of lives and damage to economies due to coronavirus which could have been avoided if China had shared the needed information with other countries transparently at an early stage and not allowed its natives to carry the virus abroad.

Eroded trust with countries

China threatened to cut off all trade links with Australia as the Morrison government called for a robust enquiry into coronavirus origin. China has suspended exports from 4 major beef facilities, while barley has been threatened with tariffs of 80%. However, Morrison government has assured not to give up stating that Australia will always stand on the ground when it comes to the things it believes in and will reach out to the rest of the world seeking to deal with it honestly, fairly and openly.

China’s mask diplomacy also gathered news as it flew bulk of face masks and medical supplies to hard-hit countries like Italy and France. Beijing was accused of price gouging by Chinese suppliers of medical supplies and blindness to how its actions are viewed.

India has also restricted China’s defective personal protective equipment exports at which China is outraged. Hence, China has hampered its relations with many countries after it lashed out against the blame for the coronavirus pandemic.

Companies leaving China

Many companies are moving out of China, spoiling the manufacturing sector of the country even more. China’s exports plunged USD 25 billion during the first half of 2019 amid US-China trade spat as tariffs soared and big traders started losing confidence in China.

Many companies that have manufacturing plants in China have already been looking to set up alternative plants in other countries to avoid risk factor. Environment factors and actions to curb pollution have increased the cost of production for companies engaged in energy, mining, textiles and autos.

ALSO READ: China has tamed the coronavirus; It’s now the turn of the economy

Countries like Indonesia, Vietnam, Cambodia, Thailand and Bangladesh are stepping up by making considerable investments in infrastructure, transport and development of special economic zones to become manufacturing hubs.

Vietnam is offering manufacturers access to ASEAN free trade and preferential trade pacts with the EU, Asia and the USA. Indonesia has benefitted steel plants relocated from China by offering them better trade conditions with reduced labour costs. Hence, these countries are increasingly attracting companies.

Shinzo Abe, Prime Minister of Japan, has shelled out USD 2.2 billion to help domestic companies dissociate their supply production chains from China. Similarly, Bruno Le Maire, Finance Minister of France has asserted the need to strengthen its sovereignty in the supply of certain strategic value chains like cars, medicine and aerospace. India has lowered its corporate tax and is aiding companies moving out of China through the provision of infrastructure, land and utilities.

Global power at risk

This breakup of the Chinese supply chain will be devastating for the Chinese economy affecting high-value jobs, internal stability and purchasing power of its people, ushering a period of economic sovereignty.

Shaky trade relations and instabilities in the global economy have resulted in companies to rethink their supply strategies. However, it is of high importance that the countries must not forget the importance of trade interdependence to meet the needs of citizens. It must not be completely done away with as countries move towards exercising greater control over their production to restrict the domestic economic disruption.

However, China remains a crucial destination for many countries due to its vast network of manufacturers and suppliers with timely deliveries, safety certificates, innovative and high-skilled suppliers and high-tech ecosystem. Hence, many companies will continue to thrive in China as moving out of the country will not be easy.

Harsh environment regulations, increasing costs of production, uncertainties on a trade war and coronavirus have asserted the need for companies to diversify their production rather than only being dependent on China.



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