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The economy of China is expected to be adversely affected by COVID-19 pandemic in 2020. The real gross domestic product (GDP) growth of China is expected to slow down, unemployment level to increase and current account balance to decrease due to COVID-19 this year. As of 23^rd June 2020, China had 83,418 confirmed COVID-19 cases out of which 78,425 people have recovered from the disease while 4,634 have lost their lives.

If the COVID-19 outbreak remains under control resulting into recovery of economic activity later this year, China’s real GDP growth is projected to slow to 1.181% in 2020 compared to 2019. This will be by far the lowest growth China has registered in more than four decades. In China, GDP output appears to be recovering from the large drop at the start of the year, but the strength of the expected rebound is uncertain.

The Chinese government has implemented various monetary and fiscal policies to lessen the economic impact of COVID-19 pandemic. These policies include provision of tax relief, emergency health and welfare spending worth approximately 2.8 percent of GDP, significant liquidity injections and the authorization of additional special central and local government bond issuances equivalent to about 2.6 percent of GDP. Despite this, as per World Bank, the companies in China are still facing funding shortages due to decreased external demand.

The steep economic slowdown due to COVID-19 pandemic was preceded by prolonged trade war with USA. This has aggravated the Chinese government’s challenge of strengthening economic activity without compounding financial stability risks. However, China still has wiggle room to use various policy measures to stabilize the economy thanks to its huge forex reserve and large population which can be utilized to increase public and private consumption.

We have covered various macroeconomic factors and PESTLE (political, economic, social, technological, legal, and environmental), SWOT (Strengths, Weaknesses, Opportunities and Threats) and risk analysis for China in separate market research reports.

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ImplicationÌýof U.S. China Phase One Trade Deal

On 15^th January 2020, China and USA signed the . In this trade deal China agreed to increase purchase of U.S. products and services by at least USD 200 billion in next two years than it did in 2017 before start of trade war.

This includes USD 77.7 billion of additional manufacturing purchases like iron and steel, machinery, pharmaceuticals, aircrafts and automobiles. China will increase manufacturing purchases worth USD 32.9 billion in 2020 and a USD 44.8 billion in 2021.

China will also be buying USD 52.4 billion worth of energy products like crude oil and liquified natural gas (LNG) over next two years. China will increase energy purchases worth USD 18.5 billion in 2020 and a USD 33.9 billion in 2021 from a base year figure of USD 9.1 billion in 2017.

China will also purchase additional USD 32 billion worth of U.S. farm goods like meats, grains, oilseeds including soybean and seafood in next two years. China will increase farm purchases worth USD 24 billion in 2020 and a USD 19.5 billion in 2021 from a base year figure of USD 12.5 billion in 2017.

China also agreed to but U.S. services worth USD 37.9 billion like financial services, cloud computing, travel and tourism in next two years. China will increase U.S. service purchases worth USD 12.8 billion in 2020 and a USD 25.1 billion in 2021.

Global economic and trade flow disruptions due to COVID-19 which originated in Wuhan could complicate the implementation of this U.S.-China Phase One deal. China could fail to honor its commitment of purchasing U.S. products and services worth US$200 billion above its 2017 levels over the next two years. This can then lead to renewed trade tensions with U.S. which will adversely affect Chinese economy further.

Impact on China's GDP

China’s real gross domestic product (GDP) was CNY 90,233.89 billion in 2019 and due to COVID-19 outbreak it is estimated to grow by 1.181% to be around CNY 91,299.55 billion in 2020.

China’s GDP from Agriculture

China’s GDP From Agriculture decreased by 591.80% to CNY 1018.6 billion in the first quarter of 2020 from CNY 7046.67 billion in the fourth quarter of 2019.

China’s GDP from Construction

China’s GDP from construction decreased by 656.07% to CNY 937.8 billion in the first quarter of 2020 from CNY 7090.43 billion in the fourth quarter of 2019.

China’s GDP from Manufacturing

China’s GDP from manufacturing decreased by 390.56% to CNY 6464.2 billion in the first quarter of 2020 from CNY 31710.87 billion in the fourth quarter of 2019.

China’s GDP from Services

China’s GDP from services decreased by 335.47% to CNY 12268 billion in the first quarter of 2020 from CNY 53423.31 billion in the fourth quarter of 2019.

China’s GDP from Transport

China’s GDP from transport decreased by 444.21% to CNY 786.50 billion in the first quarter of 2020 from CNY 4280.21 billion in the fourth quarter of 2019.

As per International Labour Organization (ILO), China’s labor force has been decreasing at a CAGR of 0.26% since 2017 and was estimated at 780.839 million in 2019. China’s % of employed population has also been decreasing at a CAGR of 0.66% since 2017 and was estimated at 65.05% in 2019.

The employment in Chinese agriculture segment which consists of activities like agriculture, hunting, forestry and fishing has been declining at a CAGR of 3.04% since 2017 and was estimated to generate 25.363% of total employment in 2019.

The employment in Chinese industrial segment which consists of activities like mining and quarrying, manufacturing, construction and public utilities (electricity, gas, and water) has been increasing at a CAGR of 0.16% since 2017 and was estimated to generate 28.201% of total employment in 2019.

The employment in Chinese services segment which consists of activities like wholesale and retail trade and restaurants and hotels; transport, storage, and communications; financing, insurance, real estate, and business services; and community, social, and personal services has been increasing at a CAGR of 1.68% since 2017 and was estimated to generate highest employment at 46.436% of total employment in 2019.

Impact on Livelihood of Chinese Nationals

On 28^th May 2020, Chinese Premier Li Keqiang that China has over 600 million people (around 43% of estimated 2020 Chinese population) who earn CNY 1000 (USD 140) per month. He also said that due to ongoing COVID-19 pandemic, these set of people have been mostly affected. He also mentioned that the average per-capita annual income in China is CNY 30,000 (USD 4,193) but the spread of this income is not uniform. As per Chinese Premier Li Keqiang, China faces difficult task of reducing absolute poverty in the coming years.

Mr Li Keqiang also announced that Chinese government has decided to expand the coverage of of subsistence allowance and unemployment benefits which covers around 60 million people in China today.

If we consider these 60 million people mentioned by Chinese Premier Li Keqiang as unemployed population then this will roughly 7.68% of total labor force.

Before 2018, China calculated its unemployment rate as total number of people who registered as unemployed over the total labor force. There were two major flaws to this system. First that the unemployment rate didn’t take into account millions of migrant workers in China. Second problem was that those who were qualified to report their unemployment status may not do so because of tedious paperwork, fear of social stigma and meagre unemployment benefits.

Since 2018 this unemployment rate calculation methodology was changed to be based on surveys of Chinese urban residents including migrant workers who had lived in cities for more than six months. This still doesn’t cover large population who live in rural areas. As per National Bureau of Statistics of China (NBS), China's rural population as a percentage of total population was to 40.42 percent in 2018.

As per National Bureau of Statistics of China (NBS), the official surveyed Chinese unemployment rate was 5.9% in March 2020, down from the record-high of 6.2% in the first two months of the year. The unemployment rate as per new calculation model adopted by NBS has been hovering around 5% since 2018.

As per International Labour Organization (ILO), China’s vulnerable employment which includes contributing family workers and self-employed workers as a percentage of total employment has been decreasing at a CAGR of 1.18% since 2017 and was measured at 45.378% of total employment in 2019. . A high proportion of contributing family workers who are generally unpaid, even though they contribute towards family income indicates weak development, little job growth, and often a large rural economy. Each such status group having vulnerable employment faces different economic risks and contributing family workers and self-employed workers are the most vulnerable - and therefore the most likely to fall into poverty.

Self-employed and informal workers are the most vulnerable as they don’t have any formal work arrangements, are the least likely to have social protection and safety nets to guard against economic shocks like the once caused by COVID-19 pandemic, and often are incapable of generating sufficient savings to offset these shocks.

This include a large number of migrant workers who have been displaced from their job locations due to COVID-19 pandemic. In the remaining month’s in this financial year it is unlikely that the unemployment situation will normalize to pre COVID-19 time for China.

As per International Labour Organization (ILO) and World Bank, China’s unemployment rate was 4.32% of total labor force in 2019. Due to slowdown in global economic activity due to COVID-19 pandemic the unemployment is expected to increase by 76.34% and reach 18.26% in 2020. This forecast is based on a single impact scenario of COVID-19. In case second wave of COVID-19 outbreak this year the unemployment levels in China can increase further due fresh imposition of lockdown measures and loss of economic activity.

As per IMF, China’s current account balance is expected to be 0.545% of GDP in 2020 compared to 0.969% of GDP in 2019, meaning China will remain a net lender to rest of the world in 2020.

Source – With inputs from Organisation for Economic Co-operation and Development (OECD), International Monetary Fund, World Bank and National Bureau of Statistics of China