Economic Update


Repositioning of Global Supply Chains?

The latest economic data from Mainland China reveal the hard facts that the world’s second largest economy has been severely hit by the coronavirus outbreak.

To remove the seasonal influence of the Lunar New Year, the National Bureau of Statistics normally publishes a range of data for the first two months of the year together.

In the first two months of 2020, industrial production tumbled 13.5% year-on-year, while fixed assets investment and retail sales plunged 24.5% and 20.5% respectively (Figure 1).

Exports and imports fell by 17.2% and 4% respectively, according to data released by the General Administration of Customs earlier this month. The steeper decline in exports relative to imports indicated that it was mostly a supply shock.

While businesses and factories in the Mainland have gradually begun to resume operations, the deepening coronavirus pandemic across the globe suggests that an economic recovery may not come in the near term. And the total economic costs may be much larger than initially expected due to falling demand elsewhere.

This pessimism is reflected by the recent slump in global stock markets initiated by the coronavirus pandemic. The plunge in market sentiment seems to be prevailing in all major economies despite policymakers rolling out both monetary and fiscal measures to cushion the negative impacts brought by supply chain disruptions, travel restrictions and the shutdown of cities and even entire countries.

The volatility in financial markets might prove to be transitory. However, the coronavirus could have longer term impacts. The disruption of economic activities in recent months has forced multinationals to accelerate the assessment of their China-centric global supply chains and just-in-time delivery models, which have flourished since China’s accession to the World Trade Organization in 2001.

For instance, China’s annual exports of automobiles and parts increased from US$3 billion in 2001 to US$83 billion in 2017. About 80% of global auto production is currently dependent upon parts from China.

Changing the current supply chain model has already been a topic of discussion since the flaring up of Sino-U.S. trade tensions in recent years.

If such a reversal does materialise, then Hong Kong -- a key trading and transshipment hub between Mainland China and the rest of the world -- might have reason to worry.


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