COVID-19: Implications on China’s manufacturing output

Over the last two decades, China, also known as factory of the world, has become the world’s largest exporter and an integral part of the global production supply chain.  With the onslaught of COVID-19 on China’s production capacity, the economic impacts are felt not only in China, but also around the world.  Lee Kok Leong, executive editor, Maritime Fairtrade, reports

China has established itself as a key source of materials and components for many products, such as automobiles, cellphones, medical equipment, and more.  Chinese suppliers are critical for many companies around the world and this implies that any disruption in China will be also felt outside the country’s borders, impacting European, American and East Asian regional value chains.

Over the last month, as a direct consequence of the COVID-19 outbreak, China has seen a dramatic reduction in its manufacturing Purchasing Manager’s Index (PMI) to 37.5, its lowest reading since 2004. This drop implies a two percent reduction in output on an annual basis.  This index is highly correlated with exports and such a decline implies a reduction in exports of about two percent on an annualized basis. In other words, the drop observed in February spread over the year is equivalent to minus two percent of the supply of intermediate goods. 

Indicators on shipping data also suggest a reduction in Chinese exports for the month of Feb. Container vessel departures from Shanghai were substantially lower in the first half of February with an increase in the second half. However, the Shanghai Containerized Freight Index continues its decline, thus indicating excess shipping capacity and lower demand for container vessels.

“It is unavoidable that the novel coronavirus epidemic will have a considerable impact on the economy and society,” said China’s president Xi Jinping, in a televised address on 23 Feb.

According to the United Nations Conference on Trade and Development (UNCTD), the two percent contraction in China’s output has ripple effects through the global economy and thus far has caused an estimated drop of about US$50 billion across countries. 

A reduction in Chinese supply of intermediate inputs can affect the productive capacity and therefore the exports of any given country depending on how reliant its industries are on Chinese suppliers.  The most affected sectors include precision instruments, machinery, automotive and communication equipment.  Among the most affected economies are the European Union, United States, Japan, South Korea and Vietnam.

In Japan, Honda will reduce vehicle output at two of its plants in Saitama Prefecture for a week or so in March because of disruption of parts supply from China.  Also, some European auto manufacturers may face the shortage of critical components for their operations, companies in Japan may find it difficult to obtain parts necessary for the assembly of digital cameras, and so on.  For many companies, the limited use of inventories brought by a lean and just-in-time manufacturing process would result in shortages that will impact their production capabilities and overall exports. 

Overall, the most impacted economies will be the European Union (machinery, automotive, and chemicals), the United States (machinery, automotive, and precision instruments), Japan (machinery and automotive), South Korea (machinery and communication equipment), Taiwan (communication equipment and office machinery) and Vietnam (communication equipment). 

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