China Won’t Save Us This Time

“We kindly welcome you onboard our first passenger flight to China since the start of the coronavirus crisis.” The captain’s voice crackles over the intercom, addressing the around 180 passengers who have boarded the Lufthansa jet at the Frankfurt Airport. They are mainly technicians and executives from German car and machine manufacturers who are being sent back to their Chinese factories. There are also a few pregnant women eager to see their partners again. Many have children on their laps. There are also a few diplomats and journalists.

China closed its borders to foreigners at the end of March, when the epidemic was dying down there but flaring up in the rest of the world. Those borders were reopened on the last weekend in May for a group of representatives of German industry, with Beijing hoping that the foreigners will give China’s economy a much-needed boost. There are some 5,000 German companies with branches in China.

China has accounted for a third of all economic growth around the world in the past 10 years. Many hopes are pinned on the country that, during the financial crisis more than a decade ago, spent 450 billion euros ($511.2 billion) on domestic stimulus measures, thus making a decisive contribution to preventing the total collapse of the world economy. Will China play a similar role this time around? Will it emerge from the current crisis more powerful than before? Or has the coronavirus also caused lasting damage to the Chinese economy?

A Fragile Recovery

The country is being extremely careful, even as it allows the Germans to gradually return, and for weeks, Germany and China have been negotiating over passenger lists and visa and quarantine regulations.

Before departing from Frankfurt, all passengers are tested for Sars-CoV-2 and masks must be worn at all times onboard. To minimize contact between flight attendants and passengers, in-flight service has been cancelled, with each passenger receiving a 1.5-liter bottle of water and a large box of snacks. Flight attendants take passengers’ temperatures every four hours.

Upon arrival at the airport in Tianjin, 130 kilometers (80 miles) from Beijing, hundreds of medical staff are waiting. They wear protective suits, face masks and gloves, and have plastic shields in front of their faces. They take passengers’ temperature again, help them install an official health app and take samples of saliva, nasal secretions and blood. It’s a hive of activity, and all the paperwork must be in order. It takes more than an hour.

Buses then take the new arrivals to a hotel that has been designated by the authorities. Nervous employees escort the guests in through the back entrance after disinfecting their luggage with a spray pump. Then the doors slam shut. No one is allowed to leave their room during quarantine.

The whole procedure is symbolic of China’s approach to the current crisis. The country has closed itself off and is exercising extreme caution. There is a widespread fear that the country could lose all of the hard-won progress it has made and that the pandemic could return. And that the country could be dragged down into the global economic downturn.

Inside China, the virus has been largely contained. That fact, along with the measures that have been taken to seal off the country from the outside world, have made it possible for the economy to recover slightly. But it’s still too weak to lift the global economy along with it. And the progress that has been made is fragile.

Time for a Nice Car

The Festo Group, based in the German city of Esslingen, has a plant in Jinan in eastern China, and when DER SPIEGEL paid a visit back in late 2019, an employee showed off an immaculate production facility. There was no dust on the floor, hazardous areas were clearly marked and there were signs all over about workplace safety. From its Jinan plant, Festo Group supplies the Chinese market with control assemblies and automation technology. Its customers are in biopharmaceuticals, the automotive sector and the food and packaging industries.

These days, production is once again up and running. In January, the Chinese New Year and the outbreak of the epidemic led to a two-week standstill at Festo, but since March, sales have exceeded budget goals, reported Thomas Pehrson, the company’s managing director for China, in an early May email. Despite all the uncertainties, he expects the “recovery trend in all sectors” to continue.

At the time of his email, Pehrson said production levels at the factory were 20 percent higher than normal, adding: “And we forecast this lasting for at least the next two quarters.” Of course, Festo is also benefiting from a special circumstance: The company supplies several manufacturers of respiratory masks, producers of ventilation equipment and firms working on vaccines.

But there is also cause for hope in the automotive industry, which suffered a catastrophic slump at the beginning of the year. In May, sales in that sector were 12 percent higher than in the same month last year. After two years of sluggishness, Chinese industry has finally begun to pick up again since April. “The automotive industry is buzzing. It’s really amazing,” says Jörg Wuttke, the president of the EU Chamber of Commerce in China (EUCCC). Since customers are daring to go outside again, the Porsche showroom in Beijing, for instance, has been packed. “Fact is, there’s a wealthy upper class that thinks now is the time to get a really nice car.” That’s true, at least, for the premium sector, he said.

Even the industries hit the hardest by the coronavirus, such as tourism, are recovering now that the authorities have relaxed strict travel restrictions. During China’s Qingming festival, a three-day commemoration of the dead, some 43 million Chinese booked domestic trips. A month later, during the five-day May holiday, China’s travel industry registered a total of 115 million travelers. That’s a significant increase, though still a long way from the 195 million who traveled during the May holidays in 2019.

The Tunnel Is Only Just Beginning

The retail sector is headed in a similar direction; it’s picking up noticeably, though it’s still well below last year’s levels.

The Purchasing Managers’ Index (PMI), surveyed by the business magazine Caixin, rose to 54.4 in May versus 47.6 in April. A PMI value above 50 indicates an expansion of economic activity, below 50 a contraction. The composite index encapsulates both the manufacturing industry and the service sector. “A month ago, the recovery was still on somewhat sandy ground, today it’s a little firmer, but not yet concrete,” says Jens Hildebrandt, head of the German Chamber of Commerce in Beijing.

Eighty to 90 percent of the companies resumed production in early May, according to economic expert Seung-Youn Oh from Bryn Mawr College in Pennsylvania. “Compared to January and February, when everything came to a standstill, we are back to normal,” but companies are a long way from having recovered their losses, she says.

And many of the indicators that initially seemed encouraging have sobering explanations. Sure, production increased, but this was apparently mainly because companies had replenished their stocks. In contrast, order intake in April was down. By the same token, the significant increase in exports in April was probably also due to the fact that Chinese container ports had been idle for much of the first quarter and are only now working through the backlog.

“Of course, everyone is hoping for the light at the end of the tunnel, but we only just drove in,” says Max Zenglein, chief economist of the Berlin-based Mercator Institute for China Studies (MERICS). He thus warns against placing too much hope in China.

At the beginning of the pandemic, the China-based supply side dried up, says the economic expert Oh. “Now demand is shrinking in the developed world.” The country hasn’t been as dependent on exports as it once was in a long time. Their share of gross domestic product has halved since the mid-1990s to 17.4 percent. Individual companies and regions, however, will nevertheless be hard hit by weak global demand, including the 113 million-strong province of Guangdong, which includes the Pearl River Delta, home to many of the country’s exporters.

Prosperity for Power

Since China began publishing its quarterly figures in 1992, the economic situation has never been as dire as it is now. Even at the height of the global financial crisis, growth in China fell by only 2.4 percentage points quarter-to-quarter. In the first quarter of this year, it was down by 12.8 percentage points. “The first time I looked at the numbers…” Zenglein says hesitantly. “I don’t think there’s an economist alive who’s ever seen anything like this.” Of course such an abrupt interruption was going to have a significant impact on employment, and according to China’s National Bureau of Statistics, unemployment stood at 6 percent in April, after 5.9 percent in March and a record 6.2 percent in February. Historically, the rate has hovered around 4 percent, making it hard to believe that the new figures paint a realistic picture.

One doesn’t even need to assume political manipulation to doubt the statistics. It’s enough to look at the methodology. For a long time, the statistics excluded the nearly 300 million migrant workers who, for lack of an urban household registration, are not entitled to such transfer payments. In 2018, the calculation was adjusted. It’s now based on surveys which, though they now include migrant workers, are only conducted in cities. But they ignore the situation in the countryside, where many domestic migrant workers return to their rural homes when they lose their jobs.

At the end of April, analysts with the securities trader Zhongtai Securities reported that according to their calculations, 70 million workers had lost their jobs in the wake of the coronavirus crisis. If accurate, that would translate to an unemployment rate of 20.5 percent. The company withdrew the report the same day, possibly due to an intervention by the authorities, but at the end of May, Gavekal Dragonomics followed with their own report. Analysts there put the number of unemployed at 60 to 100 million.

They also coincide with another record. Some 8.5 million students will graduate from China’s universities this year. If many of them are unable to find jobs, or only unappealing ones, the problem would thus spread to the middle class.

An oft-repeated anecdote holds that U.S. President George W. Bush once asked his counterpart Hu Jintao what kept him awake at night. Bush said that he feared a second 9/11. His Chinese colleague replied that what robbed him of sleep was the knowledge that he had to create tens of millions of new jobs every year. Because that is the foundation of the Chinese social contract. The Communist Party provides work, income and prosperity for its citizens, while in return, the people accept the party’s authoritarian rule. High unemployment would create a problem of legitimacy.

Support for SMEs

Zenglein, the economist, emphasizes that China has never had to contend with a recession since the beginning of the reform era in the late 1970s. As a result, the country lacks the mechanisms and the experience to deal with such an unfamiliar situation. “I wouldn’t say that China has forgotten to build up social security systems, but it has neglected them a bit. When you’ve been growing 10 percent annually for decades, such issues are not a priority.”

At the recent National People’s Congress, Prime Minister Li Keqiang made clear what China’s leadership sees as its key economic policy tasks for the coming period: “The protection of jobs, livelihoods and market entities.” In other words: The people must not be allowed to fall back into poverty. A massive wave of bankruptcies is to be avoided.

To prevent this, Beijing is even breaking with economic policy dogmas. The budget deficit is expected to rise above 3 percent, long viewed as the highest acceptable rate, to as high as 3.6 percent. In addition, for the first time in many years, the government is foregoing a nominal target for economic growth. “This is really overdue and should be welcomed,” says EUCCC President Wuttke. “Otherwise, people will be tempted to boost the gross national product at all costs. Whoever digs a pit and then fills it back up again, according to this logic, has performed two tasks for the gross national product.” Not setting a target is a clear message, Wuttke says: “No money will be wasted here.”

Local governments and companies have begun issuing vouchers and coupons worth billions in order to boost consumption while a reduction in VAT tax is also intended to have the same effect. The government plans to expand unemployment benefits. A temporary suspension of corporate income tax, reduced social security contributions and extended credit periods are aimed at providing relief for small and medium-sized enterprises. Recently, it was announced that the government wants to make an additional 50 billion euros ($56.9 billion) in loans available to them through regional banks.

These companies are the linchpin of the crisis. They provide four out of five urban jobs — and 85 percent of these companies would slide into bankruptcy within three months without additional financial assistance. That’s according to a survey conducted jointly by Beijing University and Tsinghua University in February. The government therefore instructed major banks to increase lending to these businesses by 40 percent. Traditionally, the banks have preferred to loan to state-owned enterprises, because unlike private businesses, in effect they cannot go bankrupt.

Problems Remain

China wants to invest heavily like it did during the global financial crisis. But unlike then, the measures are “not geared at big infrastructure projects,” says Prime Minister Li. Instead of new railway lines and airports, the money will this time go primarily into digital infrastructure like 5G networks, data centers or artificial intelligence. This could widen the lead that China, in part, already enjoys over the West in some of these sectors. To this end, Beijing plans to issue bonds worth 470 billion euros this year, an increase of 200 billion euros over the previous year. Chinese IT companies and network equipment suppliers will likely be the main beneficiaries. The rest of the world will have to wait.

The investment program is unlikely to diffuse China’s trade conflict with the U.S., which has long since developed into a tech war. This is especially true now that the antagonism is more than just atmospheric. U.S. President Donald Trump recently announced that Hong Kong would be stripped of its trade privileges because, from his perspective, the city can no longer be considered autonomous from China. Beijing is said to have already retaliated by instructing several state buyers to cancel orders for U.S. soybeans and pork. China buying more agricultural products from the U.S. was a fundamental part of the Phase 1 trade deal that was concluded in January. Nevertheless: Of the $36.5 billion in purchases promised for 2020, the Chinese only ordered $3.4 billion in the first quarter, their lowest amount since 2007.

This time around, China won’t be a driver of global growth. After all, the fear of a second wave of coronavirus infections still looms.

One of the passengers on Lufthansa flight LH342 to Tianjin last Friday was a 34-year-old engineer. Like all of his fellow travelers, he was tested for SARS-CoV-2 and the result came back negative. The man from the small town of Blaustein in the state of Baden-Württemberg exhibited no symptoms and his body temperature was 36.3 degrees Celsius (97.3 degrees Fahrenheit), as the Tianjin Health Commission would later announce.

Shortly after arrival, at around noon on Saturday, he was separated from the other Germans and tested again, this time producing a positive result The man is apparently the carrier of an asymptomatic infection. The Chinese took him to a local hospital where they put him under medical observation.

Some of his fellow travelers had hoped to be allowed to leave the central quarantine hotel after only 48 hours, thanks to a special arrangement. The authorities, however, quashed that hope. Everyone is now stuck in their rooms for two weeks. The virus has yet to be defeated.

Icon: Der Spiegel

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