On Jan 31, the World Health Organization announced its final decision on the determination of a public health emergency of international concern regarding the outbreak of the novel coronavirus in China.
Before the announcement, international markets were worried about the results of the WHO assessment, with the prices of safe-haven gold and silver surging for a while.
After the announcement, the prices of both precious metals went down significantly, indicating the market’s concern about the epidemic has eased.
Policies need to be prepared in advance. Under the premise of ensuring the prevention and control of the epidemic, it’s necessary to plan ahead for production recovery and stabilize the expectations of enterprises and financial institutions.
I have conducted an investigation on several manufacturing industries like the clothing, steel, machinery and petrochemical sectors in provinces such as Guangdong, Hubei, Zhejiang and Hebei and Shanghai municipality.
The situation varies from place to place and from industry to industry. But in general, industrial production has been negatively affected to varying degrees in terms of labor, orders, inventory, production and transportation.
Compared with the service industry, whose demand has been reduced due to the epidemic, the situation of industrial production activities is even more distressed. Due to the epidemic, the contradiction between supply and demand in industrial production activities is quite prominent.
I. Short-term difficulties facing economic recovery
The escalation of the epidemic occurred before Spring Festival, which made employees uneasy to return to their work place. In the short term, there are generally three obstacles in recovering industrial production.
First, activities may be delayed due to the postponements in work resumption, higher protection standards and supply shortages. Major industrial companies did not restart operations until Feb 9. Nevertheless, some are still waiting based on the progress of epidemic prevention and control, which has a certain degree of uncertainty. Traffic flow data showed the reluctance of some employees to return to work.
Even if the employees choose to come back for work, how do you put them in quarantine? Is it possible for companies to offer sufficient protective materials? In the early stages of restarting production, are there any prevention standards and event handling procedures that companies should follow? These are the real problems faced by enterprises. For large labor-oriented companies especially, the above-mentioned problems are more prominent.
Second, the epidemic halted transportation in certain areas, and created logistical challenges for delivery. In order to control the epidemic, some provinces carried out access control and temperature detection on their highways. But some places closed or even blocked the roads.
Meanwhile, the logistics sector has been negatively influenced. Because of this, surveyed steel mills said they will face a situation where there is no place for finished products and they will lack raw materials in the coming weeks. According to statistics from Mysteel, as of Jan 30,22 construction steel companies in a southern province had a total inventory of 1.375 million metric tons, an increase of 379,000 tons from the first week after the Spring Festival in 2019.
Third, enterprises will suffer losses due to the delayed delivery of orders. In February, companies manufacturing seasonal products usually usher in a busy period of production and shipments. However, the aforementioned factors deferred the progress of production recovery, so it’s difficult for companies to deliver orders on time. As a consequence, some companies will be forced to choose airfreight to deliver goods, which generates higher costs. In particular, the delay in order deliveries may lead to greater losses for exporters.
II. Impact may last beyond first quarter
The impact of the epidemic on production activities is one-time and temporary. But how long is “temporary”? I believe the influence may last beyond the first quarter, and this possibility needs our attention.
First of all, export-oriented manufacturing firms are temporarily losing new orders, which is likely to extend the epidemic’s impact until the second quarter. Official data showed that March and April following Spring Festival are the peak period for taking export orders. The amount of orders coming in either of the two months is even higher than in September－normally the time for Christmas orders. Therefore, it can be seen that the performance of export orders in March and April will determine the trend in the following months.
At present, foreign buyers are paying close attention to the situation in China. However, due to the above reasons, the delivery time in the beginning of the year cannot be confirmed, and a certain percentage of orders will be delayed. If uncertainty in the recovery of industrial capacity remains in March, it may have a certain degree of impact on new orders for the month, which can further affect production activities in the following two quarters.
Second, fixed expenditure remains unchanged, but there are growing difficulties in production and the pressure on the capital chain will increase. While work resumption has been deferred and employees traveling back from other areas have been quarantined, companies still need to cover fixed expenses such as rent and interest on loans. Standards vary from place to place about wage payments, and some provinces required companies to pay the wages as usual.
The capital chain of privately-run industrial enterprises has already been under tension. Coupled with unchanged fixed expenditures and additional labor costs caused by the epidemic, the difficulties will have a greater impact on companies that have been in distress. If their capital chain breaks, it may cause bankruptcy and increase unemployment, which may further influence economic trends. This situation calls for attention and a full assessment.
III. Accomplish epidemic prevention and resume production
Needless to say, epidemic prevention and control remain the most important task at present. It is necessary to resolutely curb the spread of the epidemic within a short period of time, along with adopting scientific and effective measures in order to eliminate the epidemic as soon as possible.
On the other hand, as mentioned at the beginning, policies need to be planned ahead. On the premise of ensuring epidemic prevention, it’s necessary to make arrangements for production recovery in advance and reduce the mid-term impact of the viral outbreak.
First, stabilize the capital flow. It is necessary to offer capital to industries in distress through targeted tax reductions and temporary short-term financing. In particular, for private enterprises that got in trouble amid the epidemic, it’s necessary to help them stabilize their capital chain and surmount their difficulties.
Second, restore the logistics as soon as possible. It’s imperative to come up with clear standards to guarantee traffic infrastructure can function smoothly. At the same time, we should attach great importance to the key role of the logistics and transportation industry. While ensuring epidemic prevention and control, the logistics and transportation industry should resume normal operations as soon as possible.
The last point is to resume the free movement of people and production activities. The government should strengthen communication and mutual understanding with enterprises to stabilize their expectations. In particular, the government should get to know more about the difficulties facing the enterprises and adopt countermeasures to help them.
As the epidemic issue has not been resolved, local governments should clarify protective measures for companies to restart operations. It should instruct enterprises to provide employees with necessary protection and offer enterprises with sufficient protective supplies.
The writer is director of the economic development division of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, and deputy director of the Research Center for International Finance with CASS.