Trade wars, debt bombs and epidemics suffocate China's economy

When the Chinese government implemented a series of measures to combat the Wuhan virus epidemic such as banning domestic and foreign tours, locking down Hubei province and extending the Lunar New Year holiday, Much of the world's second-largest economy is in a state of paralysis.

Observers say the coronavirus has dealt a fatal blow to the struggling economy as a result of the US-China trade war and the huge debt bomb is growing.

In 2019, China's economic growth plunged to 6.1 percent, the lowest level in 30 years. The main reason for this situation is the nearly two-year trade war between China and the United States.

U.S. President Donald Trump's punitive tariffs and trade restrictions have severely affected China's economy and caused millions of workers in the country to lose their jobs.

Cold wilderness in Wuhan, the epicenter of the coronavirus epidemic. Photo: Getty Images.

Unemployment will be rampant

International experts also say that the 4-5% unemployment rate announced by the Chinese government does not properly reflect the serious health decline of the economy of 1.4 billion people.

"2020 will be an extremely difficult time for China and mass unemployment is the scariest problem,"  CNN quoted analyst Frank Ching of the Hong Kong University of Science and Technology as warned.

Mr. Hao Yao - Director of Yingsheng Global Logistics in Shenzhen (China) - revealed that the company's profit fell by more than 30% in 2019 due to customer businesses affected by the US-China trade war.

Besides the trade crisis, China's $40 trillion debt bomb is growing. China's rural banks are struggling, people's consumer debt is soaring, and the government is tightening lending controls, making it difficult for private companies to access capital.

Therefore, in 2019, the Chinese government was therefore thrust into a dilemma. That is to both ensure economic growth and prevent the risk of overspending, especially limiting "white elephant" infrastructure development projects (costly but difficult to be profitable).

"The Chinese government is trying to take the minimum necessary measures to prevent the risk of the economic train derailing,"  Bloomberg quoted Goldman Sachs chief economist Andrew Tilton as saying.

Wuhan residents shop in a supermarket at the time the city was newly locked down. Photo: Getty Images.

In the face of the risk of economic derailment, ensuring stability is a top priority. Therefore, even as the strange disease spread rapidly since December 2019, Wuhan Mayor Zhou Tianwang still took the time to promote the city's future projects in front of the Wuhan Municipal People's Council on January 7.

Mr. Chu promised to build medical schools, open the world medical exhibition, develop future industrial parks for medical companies... He did not mention half a sentence about the new outbreak.

"It's convention season and not the right time for bad news," the New York Times commented. But it was this strange disease that dealt a fatal blow, causing the economic activities of the whole of China to fall into a state of paralysis.

The economy is paralyzed

The Wuhan virus is a stunning blow to China. Domestic economic activities have stalled, causing the economy to struggle even more after 2019 has suffered a lot of damage because of the US-China trade war and the $40 trillion debt bomb.

A series of cities were closed, tourism fell into a state of paralysis, and entertainment activities and gatherings were restricted, leading to heavy damage to trade and service industries.

Manufacturing companies that employ a lot of workers also face an alarming situation when many local authorities limit large gatherings of people to prevent the spread of the coronavirus.

"If the epidemic is controlled by the end of February, the impact on the manufacturing industry can be controlled. But if by March, the virus is still not contained, customers are likely to switch to ordering in other countries,"  said Liu Kaiming, president of the Contemporary Observation Institute, as predicted.

The outbreak of the epidemic led to a serious decline in the number of orders, causing damage to both high-tech manufacturing industries and small and medium-sized enterprises, employing a lot of labor.

China closed cities to prevent the spread of the disease. Photo: Bloomberg.

While large enterprises have to cut costs, many small and medium-sized enterprises even slide to the brink of bankruptcy if the situation does not progress further.

"Every month, we still have to pay 156 million yuan ($22.3 million) to our employees. Our cash flow can only sustain this expenditure for three months. If the situation does not progress, we have no choice but to lay off employees," said Mr. Jia, owner of the Xibei restaurant chain. admit.

"Rent, salaries for employees, fixed fees remain unchanged. They are all big burdens for small and medium-sized enterprises like us," said Mr. Wang, the owner of a footwear factory in Dongguan City (Guangdong Province), as saying in the South China Morning Post  whining.

The situation is getting worse and worse

In the first trading session after the Lunar New Year on February 3, China's stock market fell as much as 8% as investors worried about the long-term economic impact of the Wuhan virus epidemic.

 CNN said that many world economic experts predict that the coronavirus epidemic could blow away 62 billion USD of the Chinese economy in the first 3 months of the year.

The target of 6% GDP growth in 2020 has now become a distant dream for China. "China's GDP growth in the first quarter of 2020 may fall below 2%," said Freya Beamish, an economist at Pantheon Macroeconomics.

Economist Diana Choyleva even predicted that the world's second economy would fall into recession (negative GDP growth for two consecutive quarters).

In addition, the deadly epidemic from Wuhan exacerbates other risks that are haunting the Chinese economy. With the coronavirus outbreak, it is difficult for China to meet its commitments in the phase 1 trade agreement that has just been completed with the US.

Accordingly, China will have to buy an additional $76.7 billion of US goods this year and $123.3 billion next year.

The deadly epidemic from Wuhan continues to spread. Photo: Bloomberg.

According to a Bloomberg source , Chinese officials hope the U.S. will agree to a moratorium on some of the commitments in the deal. A clause of the agreement states that the two sides can delay the commitment "in the event of a natural disaster or unforeseen event".

On the other hand, the United States still maintains a tough stance on China. Responding to CNBC, Mr. Navarro - a close adviser to Mr. Trump - said that there will be no way that Washington will remove punitive tariffs on China even if the coronavirus epidemic threatens the growth of the world's second-largest economy.

"It's a nonsense idea on Wall Street and I don't think there's any point in discussing it," Navarro said.

Over the weekend, the People's Bank of China announced that it would inject about 1.2 trillion yuan — or $174 billion — into the country's financial system. However, international experts say these measures are not enough to bring China's economy back.

"Even with the most optimistic scenario of the epidemic being quickly controlled and economic activities soon returning to normal, we think the People's Bank of China still needs to cut further interest rate cuts this year." economist Hubert de Barochez of Capital Economics affirmed.

Phuong Thao/ Zing.vn