KEI: "China's Production and Consumption Shocks Bigger Than Financial Crisis... Need for Coordinated Support Policies for Export Companies"

"Shanghai and Guangzhou late March to early April, Beijing mid-April to mid-May
Social activities expected to recover
Production levels likely to take long to return to pre-COVID-19
28.2% of Korea's intermediate goods exports go to China
Need for mid- to long-term support measures for export companies and travel/dining industries"

[Image source=Yonhap News]

[Asia Economy Reporter Moon Chaeseok] There is a forecast that the shock to production and consumption within China due to the spread of the novel coronavirus infection (COVID-19) will be greater than that of the financial crisis. It is suggested that support should be provided to companies operating locally and those trading with China through policy cooperation with the Chinese government.

On the 26th, the Korea Institute for International Economic Policy (KIEP) published a report titled "Analysis and Outlook of China's Production and Consumption Shock Due to COVID-19," stating that support measures for Korean companies, including mid- to long-term measures for service industries such as travel and dining, should be prepared.

KIEP judged that the production and consumption shock within China caused by COVID-19 will be greater than the 2008 global financial crisis.

The year-on-year growth rate of manufacturing value-added from January to last month was the lowest ever at -15.7%. In particular, the value-added growth rates of automobile manufacturing (-31.8%), transportation equipment manufacturing (-28.2%), and machinery equipment manufacturing (-28.2%) dropped sharply.

Due to production stoppages, the cumulative production volume of automobiles, mobile phones, metal cutters, and textiles from January to February also decreased by 30-45% compared to the same period last year.

Accordingly, China's manufacturing Purchasing Managers' Index (PMI) last month remained at 35.7, lower than the 38.8 during the 2008 global financial crisis. The service sector PMI was even lower at 29.6.

Among service industries, accommodation providers and duty-free shops were hit hard. The sales of accommodation providers with annual sales exceeding 2 million yuan (approximately 344.7 million KRW) from January to February decreased by about 50% compared to the same period last year due to reduced foot traffic caused by COVID-19 prevention measures.

Retail sales also declined. Although online consumption increased, China's retail sales from January to February were 5.213 trillion yuan (approximately 862 trillion KRW), down 20.5% year-on-year. The decline in consumption of major durable goods such as automobiles and mobile phones, along with reduced travel and outings, led to a slowdown in service consumption.

Since mid-last month, production has resumed mainly in coastal areas of China, and social activity levels in Shanghai and Guangzhou (Guangdong Province) are expected to recover to pre-COVID-19 levels by the end of this month to early next month, while Beijing is expected to recover between mid-next month and mid-May.

China's production level is expected to take longer to return to pre-COVID-19 levels. This could exert significant pressure on the performance of Korean export companies highly dependent on China.

According to KIEP, China's export value from January to February was $292.45 billion, down 17.2% year-on-year. As COVID-19 has spread to China's major export destinations such as Europe, the United States, and Japan, the outlook for China's exports this year faces uncertainty.

Exports to the European Union (EU, 15.5%) and the United States (14.7%), which account for the largest shares of China's total exports from January to February, decreased by 18.4% and 27.7% respectively compared to the same period last year. The decline in overseas demand due to the COVID-19 pandemic is likely to lead to a slowdown in China's exports.

KIEP emphasized that the government should actively support Korean companies operating in China and those highly dependent on China. As of last year, Korea's dependence on China for intermediate goods exports was as high as 28.2%.

KIEP suggested that mid- to long-term additional employment stabilization policies and corporate policy support should be provided for the travel and transportation industries. Unlike durable goods consumption, travel cancellations and reduced dining out are expected to be difficult to recover quickly.

KIEP advised that the increase in online consumption could mitigate the shock to physical consumption, so the domestic online consumption market should be expanded. KIEP stated, "Efforts are needed to utilize the online consumption market as a new channel for entering the Chinese domestic market in the future."

This content was produced with the assistance of AI translation services.