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Coronavirus’s Aftermath

By Ichiro Suzuki

As the battle against coronavirus intensifies outside of Asia, it is still way too early to talk about the changes the virus would bring to the world. Nonetheless, it is almost certain that it makes this planet a different place when this panic subsides. Of a variety of possible changes, the followings could be what we may see. 1. Reassessment of China risks Unwinding and reconstruction of supply chains centered around China has been in progress for several years already before the outbreak of the disease, due to rising wage in China. Despite it, the world still got reawakened and stunned by witnessing the consequences when aggressive bets on China go awry. The lure of the huge domestic market and relatively cheap labor looked irresistible until several years ago, and this incident has brought to light the risks that China entails. It was less than 20 years ago when Severe Acute Respiratory Syndrome (SARS) paralyzed the East Asian economies albeit a relatively brief period, and the memories of the disease still stick vividly in the region. COVID-19 certainly is not be the last disease that originates from China. Thousands of years of tradition of humans and wild animals living closely in the rural part of the country would not fade easily. This tradition could breed another new virus one day. Though the Chinese Communist Party has banned the sale of wild animals in the market, it is doubtful that the regulation is perfectly complied among the population of 1.4 billion, especially in rural China. Besides supply chain risks, excessive dependence on Chinese customers will be reviewed among a variety of industries from luxury goods, hospitality to universities that have shaped their business strategies to woo Chinese consumers. Due to its size, Chinese people will continue to be the largest group to the industries, but they would choose not to put their full weight on China and try to hedge risks. Amid continued realignment of global supply chains, there will be less foreign direct investment (FDI) into China than in the past. Multi-national corporations (MNCs) has been allocating smaller amount of capital into China, feeling that Chinese domestic rivals have been given unfair advantages. Adverse effects of external accounts could be felt because not only of smaller capital inflows but also of exiting of MNCs by shutting down factories and pulling capital out of the country. Coronavirus is likely to accelerate this trend. This comes at a time when China’s current account surpluses are diminishing, way down from 10% of GDP ten years ago. Worse, exports are down considerably lately as global trade is paralyzed. Amid a deteriorating trend of external accounts, China may not have as much money as the world believes it does. (On the other hand, as Chinese tourists stay home and halt their spending spree, they put a cap on the hole of the single largest negative factor on the current account, consumption overseas. It remains to be seen how these factors play out on the overall external accounts.) 2.  Aside from the disease, the developed world is becoming less hesitant to speak up against China, at the margin. Risks of offending China have always been concerns in the minds of leaders around the world, as China being a superpower and an important customer. The Communist Party has been taking advantage of the status and Xi Jinping is especially penchant for it, sometimes intimidating other countries on their behavior that does not please the CCP. South Korea and Taiwan have suffered in the past from the CCP’s abrupt decision not to send group tourists. While China remains the second largest economy and an important business partner, some countries try to speak up more openly to Beijing from this point on, based on restructured global supply chains and more diversified business strategy. Only Donald Trump has had little hesitation to challenge China openly, as the U.S. has designated China as a strategic competitor. None of other leaders would speak like Trump for sure, but some others choose to be less soft than before, and eventually find their comfortable way of speaking to Xi Jinping. (It remains to be see how the U.K.’s Boris Johnson deals with China. He seeks stronger ties with China as he has got out of the EU.) 3. Lost credibility of WHO

President Tedros Adhanon of the World Health Organization (WHO) has been notoriously indecisive and slow to act to contain coronavirus. He hesitated to declare emergency in late January and he has not yet called  COVID-19 a pandemic, as of this writing. It is widely perceived that the his lack of decisiveness was attributed his nationality, Ethiopia that is a key client of China’s Belt & Road Initiative (BRI). Ethiopia is a heavily-indebted poor country (HIPC) that owes 17% of its GDP to the world, most of it to China. At least implicitly President Tedros felt pressed not to offend the major creditor to his country. Whether his hesitance accelerated the spread of the virus or not will not be known until later years. However, he has obviously led the WTO to diluted credibility. China has just made a $20 million donation to China, and that could bind Mr. Tedros more tightly. 4. Effects on BRI Besides Ethiopia, a variety of developing countries around the world are recipients of BRI aids and they must be feeling effects of the current state of the Chinese economy. As production is halted everywhere in China, necessary materials for infrastructure projects are facing acute shortage. Such upheavals make the projects considerably behind the schedule, expanding debt burden on the part of the recipients. (While China might pick up the bills for coronavirus-related delays, there is no way to find this at present.) The worst possible development could be an outbreak of the disease in these countries through Chinese workers, who China exports to them en masse. An outbreak in countries with weak public heath infrastructure would be disasters. This could made the recipients rethink the cost of BRI.

About the author: Mr. Suzuki is a retired banking executive in Japan.


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