China business update, six months into COVID-19

Over last couple of weeks, China has eased most of its initial restrictions put in place to contain the spread of COVID-19. The country is going back to work and reopening its factories and businesses, providing a case that others can learn from. HSBC recently ran a webinar with Jenny Xu, Head of Asia Pacific Team, International Business, HSBC China, to give us an update on what she’s seeing on the ground.

After months in lockdown and with restrictions only lifting in the last few weeks, COVID-19 has been wide-ranging in its impact on businesses and general life in China. Many small businesses closed down in the first few months as the Government’s primary concern was containing the virus. The widespread return to ‘normal life’ has led to some sectors rebounding, but this is not the norm, and the response has been anything but consistent.

Unsurprisingly, the catering industry is that most affected by the pandemic, with the pace of recovery very slow. While it has so far rebounded to doing almost the same level of trade it was 12 months ago, this figure doesn’t take account of the number of businesses which have closed down. Despite the response, it’s certainly still a tough time for many.

Other hard-hit industries include commercial real estate, textiles, retail and tourism. Property has also been impacted, with rental prices dropping during the pandemic. This is despite sale prices going up, highlighting the difference in fortunes between those who can afford to buy and those who rent.

There are some sectors however that have managed to rebound from the effects of the pandemic. A few notable examples are healthcare, food and beverage, and manufacturing. The production scale in particular is nearly back to what it was this time last year. This is due to a combination of catching up with outstanding orders, the Government’s new infrastructure project, and an increased demand for electronic equipment.

Two other industries performing strongly are automobiles and electronics. The automobile industry in particular has outperformed expectations, turning a profit after 21 consecutive months of dropping sales before COVID-19. For electronic equipment, the change in lifestyle, with more people working from home, has been the largest driver of demand.

Overall, the economy is starting to move towards a state of growth. Q2 is estimated to see positive results, painting a more encouraging picture than Q1. Q3 and Q4 are also expected to see significant growth, though we must be wary as this assumes the pandemic is under control. Given the fact that much of the world is still struggling to contain the virus, it’s possible there may be worse ahead in the coming months.

Since the outbreak back in January, the Government has initiated numerous policies in an attempt to stimulate the economy. These were largely concerned with pumping liquidity into the market and lower business expense, via methods such as lowering the bank’s reserve requirement ratio, issuing special treasury bonds, lowering the tax rate and deferring tax payments. A list of priorities have also been drawn-up to ensure the stability of the economy, namely: protecting the unemployment rate, people’s living standards, a stable financial market, international trading volume, and foreign investment and foreign capital.

In the short-term, the primary aim is to keep the unemployment rate low and ensure the survival of SMEs. To this end, the Government has provided support in the form of tax policies. These include deferring rental payments, cutting utility rates and urging commercial banks to provide special SME loans. Much of this support will continue until the end of the year 2020, with a possible extension depending on how businesses are performing.

There has also been an attempt to encourage domestic spending. Recent initiatives include new shopping festivals, cities giving out shopping vouchers and retailers offering sales. These policies align with the Government’s plan to resist changing official interest rates too fast, opting instead to pump liquidity into the market.

Alongside the initiatives mentioned above, the Government has recognised wider constitutional reforms to aid the economy. These include further opening up the market, supporting increased globalisation, and investment into new infrastructure. Rather than roads and bridges, ‘new infrastructure’ instead refers to technologies such as 5G, ultra-high voltage power lines, AI and electric car charging facilities. The Government sees these areas of ground-breaking tech as essential new drivers for the economy looking forward.

Looking forward, there are numerous areas of opportunity for foreign businesses in China. In particular, for those in countries that have managed to contain much of the virus and already have good relationships with China, such as New Zealand, there is the potential moving forward to attract more Chinese commerce, tourism and students looking to study and work abroad.

The change in lifestyle and ways of working in China due to COVID-19 could also provide opportunities for growth. The move to remote work, a rise in online shopping and the increase in online education are examples of areas which have undergone drastic transformations in recent months.

Finally, the Government’s shift in focus will open up new avenues for business in China. As it moves from old infrastructure initiatives towards a greater emphasis on developing high-tech and quality healthcare, it’s clear that the opportunities in China are significantly different now than they were six months ago.