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Can China handle the economic turmoil of its viral outbreak? – Aljazeera.com

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Shenzhen, China – For Eppu Makipaa, some quick thinking in late January as a new coronavirus swept through China and many other countries helped avert a significant disruption at the company he works for.

Makipaa – a sales engineer and manager at Lifa Air International, a Finnish company that makes air purifiers and protective masks in a factory with 3,000 workers in Dongguan in southern China – opted to keep manufacturing operations going even as most Chinese companies shut down for the Lunar New Year holiday that started on January 25. 

“We decided to keep our factory open a little bit longer because we had some new product launch events going on,” Makipaa told Al Jazeera. “We saw the situation with the virus and decided that we would [only] close the factory for less than 24 hours [for the holiday].” 

This was a challenge, as most of the workers wanted to return to their hometowns and villages for the holiday. But for the staff who stayed, doing so proved to be a blessing.

“We were able to find enough workers who were willing to work, and, of course, a lot of those people were from areas that are now affected by a virus,” Makipaa said.

He says his workers find it “important and meaningful” that they are able to help the fight against the virus by supplying medical equipment for those who need it the most. 

But for many other firms in China, the coronavirus outbreak has been far more painful. And while the broader economic effect on China is still hard to gauge and likely yet to fully play out, some economists are already warning the public to brace for a sharp slowdown.

The number of infections has now exceeded those during the Severe Acute Respiratory Syndrome (SARS) epidemic of 2002-2003 with the number of deaths climbing rapidly. 

The latest outbreak brought the country to a standstill in the middle of the Chinese New Year holiday which was originally scheduled to last from January 24 to 30.

But central government authorities officially extended the holiday nationally through to February 2. Key economic powerhouses like Guangdong province in southern China have indicated that key sectors such as municipal utilities, public transport, medical supply producers, supermarkets, food production, and logistics should resume work first, with all others allowed to start after February 9. 

‘A huge challenge’

Thousands of flights, trains, and long-distance buses have been cancelled or disrupted while road traffic has become snarled by checkpoints for body temperature scans and by villagers blocking roads to keep outsiders away.

One of the many roadblocks in villages around Yangshuo, a town in southern China’s Guangxi province. People in the area are trying to prevent outsiders from entering their region [Amantin Baruti via Michael Standaert/Al Jazeera]

Millions of Chinese, many back in their rural hometowns for the holiday, have been staying indoors much of the time for fear of catching the virus or by order in over a dozen cities locked down in Hubei province, where the outbreak originated in the provincial capital of Wuhan in late December. 

Wuhan is a key transport, steel and industrial hub between all four points on the compass for China, often compared with Chicago in the United States due to its geographic importance.

In the coming days, many of those millions home for the holidays will attempt to return to major cities where they work. They will try to travel by air, rail and highway, potentially creating a transport logjam worse than the usual travel problems at this time of year. 

Once at their destination, they will need to navigate roadblocks, quarantined residences and offices, temperature scans at supermarkets and on the metro and enforced mask usage. And with mask supplies stretched, that could be difficult. 

Many business owners say their most pressing concern right now is ensuring the health of their workers as they return from the Spring Festival if they can. 

“It will be a huge challenge,” Everest Zhao, CEO of electronic cigarette company VooPoo, said of the possible labour shortages ahead. 

“Right now we’re more concerned with helping the country through this and how to keep our colleagues safe,” Zhao told Al Jazeera.

China had already been experiencing its slowest economic growth rates in nearly 30 years before the coronavirus outbreak, as the United States engaged it in a trade war. Gross domestic product (GDP) – the total value of all finished goods and services produced in a country – expanded by 6 percent in the fourth quarter of last year compared with the same period in 2018.

Zhang Ming, an economist at the Chinese Academy of Social Sciences – a top government think-tank – estimates that the outbreak could cut first-quarter 2020 GDP growth by about 1 percentage point.

“GDP growth in the first quarter of 2020 could be about 5.0 percent, and we cannot rule out the possibility of falling below 5.0 percent,” Zhang was quoted as saying in Caijing magazine. 

‘Freaking out’

With infection rates continuing to rise, the big unknown remains precisely how long and severe the coronavirus outbreak will be.

China economy coronavirus

Some analysts say fear is likely to cause the greatest impact on China’s economy, rather than actual infections or deaths [Amantin Baruti via Michael Standaert/Al Jazeera]

“The economic effect of this Wuhan coronavirus will depend on how long the outbreak lasts and its impacts, such as deaths and disabilities that result from it,” Yun Jiang, co-editor of the China Neican policy newsletter who formerly worked in the Australian government. “As the infection number is still rising, it appears unlikely that the outbreak will stop any time soon.”

Jiang told Al Jazeera that the most immediate impacts will be on tourism, retail and airlines already hurt in China and increasingly around the world as carriers halt flights to the country. 

“This [crisis] will make China reaching its GDP target of around 6 percent in 2020 more challenging,” Jiang said. “On the other hand, it may provide the Chinese Government with a quite reasonable excuse to miss its target.” 

Chinese authorities are rolling out measures to help the worst-affected areas of the economy.

For instance, The People’s Bank of China (PBOC), the central bank, is urging commercial lenders to ease credit terms for companies finding it hard to meet their debt obligations. 

“During the period of epidemic control, key enterprises that produce, transport and sell important medical supplies and daily necessities should be put on a list, and the PBC will provide them with credit support at favorable rates,” the central bank said in a statement on Monday.

But it is not clear whether such measures will be enough. Analysts say much of the economic damage could be caused by panic over the potential effect of the virus, rather than actual deaths or infections of people.

“Our clients are freaking out,” Dan Harris, partner at US law firm Harris Bricken, told Al Jazeera. “The big fear is that people will not be going back to work.”

But psychology aside, logistical challenges due to measures to contain the spread of the virus are causing very real headaches for manufacturers and the broader economy.

School start times could be another factor in key areas like Guangdong where the start is expected to be pushed back from February 17. The longer children have to stay at home, the longer the disruptions for families trying to figure out how to navigate their return to the cities, factories and offices where they work.

“The teachers put on unpaid leave are starting to realise that there is no end in sight and they too are freaking out because many of them don’t have enough money to fly out or to pay their rent, and their employers are going radio silent,” Harris said. 

Financial markets reopened on Monday for the first time since the Lunar New Year holidays and for anyone invested in stocks or commodities, it was probably a day to forget. 

Mainland China’s Shanghai Composite Index of leading stocks fell by 7.9 percent, its biggest one-day drop since 2015. The sell-off had been expected, as markets elsewhere had already reacted to the rapidly spreading virus. But still, economists say it reflects the economic pain that could lie ahead.

Massive impact

“I think the impact could be massive,” said Francesco Sisci, an Italian Sinologist who has been in Beijing since the late 1980s and who witnessed the SARS outbreak of 2003.

China economy construction

Efforts to revive China’s economy after the viral outbreak is dealt with could give growth and productivity a big boost, but until then, the country is likely to face a sharp slowdown, analysts say [File: Thomas Peter/Reuters]

“There was a boost in productivity once SARS was dealt with, but I think this time is different,” Sisci told Al Jazeera by phone.

China’s already-slowing economy and its continuing trade war with the US leave the country vulnerable to a protracted economic crisis, Sisci said.

“Whether the Chinese financial institutions have enough firepower to support the market, that is the most immediate challenge and that will impact the economy,” he said. “I would say that is what we have to pay attention to.” 

On Monday, the PBOC tried to ease the panic selling by injecting 1.2 trillion yuan ($171bn) into the market. But it is not clear whether this will be enough to support the broader economy in the coming weeks and months. 

Sisci also says a political crisis could be forthcoming regarding the upcoming National People’s Congress (NPC) meetings which start each year on March 5, where officials from across the country converge in Beijing to craft policy for the coming year.

The 2020 meetings are particularly important as leaders will chart the path forward for the next five-year economic and development plans with the 14th Five-Year Plan set to start from 2021.

Looking back to 2003, Sisci says that year’s NPC meetings helped accelerate the spread of the SARS virus.

“That was the occasion when SARS spread to Beijing, because all the [provincial] delegations go to Beijing,” Sisci said. “So in a sense, they have to deal with this outbreak by the end of February.”

Additional research assistance provided by Zhong Yunfan.

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China’s gamers hit pause button amid few releases, tough economy – Al Jazeera English

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Beijing, China – Before China began cracking down on video games, Zhang “Yvan” Yifan had no shortage of new titles to play.

These days, Zhang and his friends struggle to find games that grab their interest, after authorities implemented a nine-month freeze on issuing licences amid concerns about rising addiction in the world’s most populous nation.

So far this year, the Chinese market has released just 105 new games, compared with 755 titles in 2021, and more than 9,300 in 2017.

“Most of my friends like playing competitive first-person shooter games,” Zhang, a university student in Beijing, told Al Jazeera. “But we cannot find a game we all want to play these days. Having fewer games to choose from is really sad to me.”

Zhang’s frustration is reflected in falling sales across the sector.

Video game revenues in the first half of 2022 fell for the first time since data became available in 2008, declining 1.8 percent to 147.8 billion yuan ($21.9bn), according to industry figures published by the China Audio-Video and Digital Publishing Association and the Gaming Industry Research Institute of China. Excluding overseas sales, revenue shrank a steeper 4.25 percent.

China’s slowing economy under “zero COVID” has compounded the sector’s woes, with many young people finding they have less money for non-essential purchases such as video games.

The world’s second-largest economy barely avoided contraction in the last quarter, growing just 0.4 percent, as authorities continued to roll out harsh lockdowns to control the spread of COVID-19.

In June, youth unemployment hit 19.3 percent, the highest level on record.

China video games
Chinese gamers are cutting back on game purchases amid a lack of new titles and a slowing economy [File: Brent Lewin/Bloomberg]

For Jon, a 29-year-old Shanghai resident who often plays mobile games such as Honor of Kings, the dicey economic conditions have meant cutting back on his hobby.

“I spend less on games now than I used to, even though I earn more now than in previous years,” Jon, who asked to be referred to by his English first name, told Al Jazeera.

“That’s because I’m worried I’ll have to save more during these uncertain times, because I might be put under lockdown or face unemployment.”

Free-to-download games have not escaped the downturn either. Popular mobile titles such as Fate/Grand Order and Azur Lane rely on in-game purchases by players trying to get a leg up on their peers to make money.

“The economy and the job market are really bad,” Wang Liang, a 22-year-old university student in Beijing who enjoys first-person shooters, told Al Jazeera.

“So most gamers like me will inevitably have less disposable income to spend on games.”

The sector’s current difficulties follow an even rockier 2021. Under a sweeping regulatory crackdown on the sector, Beijing introduced time limits for online gaming by minors and real-name verification rules to prevent anonymous in-game purchases.

Although the end of a nine-month freeze on new titles in April provided a glimmer of hope for the industry, the number of releases has been a trickle compared with previous years.

The two biggest domestic players, Tencent Holdings and NetEase, which together account for about 60 percent of the market, and foreign publishers have yet to have a single title approved for release.

“Although many dozens of titles have been approved, these resourceful players who understand the Chinese gaming market and tastes of the players very well have not been able to launch new titles,” Nir Kshetri, an economics professor at the University of North Carolina at Greensboro who has researched China’s gaming industry, told Al Jazeera.

Once thriving industry

The industry’s declining fortunes mark a sharp reversal for the once thriving industry.

In 2017, China became the world’s gaming capital on the back of popular smartphone titles such as Honor of Kings and Fantasy Westward Journey, taking almost one-quarter of the $101.1bn global market, according to research by venture capital firm Atomico.

Despite the regulatory and economic challenges, China’s gaming market raked in 296.5 billion yuan ($46.6bn) in sales revenue in 2021 overall, up 6.4 percent from the previous year, according to official government data.

China’s e-sports sector the same year was worth an estimated $403.1m, making it the largest market on earth, according to research by Niko Partners.

Some industry figures see this strong foundation as cause to be optimistic about the future.

The co-founder and COO of a Tencent-owned gaming studio, who spoke on condition of anonymity, said greater regulation had been needed and the easing of the licensing freeze was a cause for hope.

“There are still many ways to stimulate the market,” the co-founder told Al Jazeera, pointing to in-app purchases and advertising, greater efficiency in production, and emerging technologies like VR and the metaverse as potential solutions.

He played down the negative effect of the economy on the outlook for the industry.

“Less disposable income means that people will be more cautious about spending on games. But it does not necessarily mean that they will spend less on games,” he said.

“Gamers will be more and more demanding, so poor-quality games can’t earn money as easily as they used to. Only high-quality games can attract gamers to continue to pay. Therefore, game companies need to follow trends, focus on improving the quality of games, create more high-quality content and explore more monetisation possibilities.”

Tencent
Major Chinese gaming companies like Tencent have not been granted approval to release games this year [File: Qilai Shen/Bloomberg (Bloomberg)

Others suggest the industry will need a significant period to recover.

More than 14,000 gaming-affiliated companies shut down during the first six months of the licensing freeze, according to a report in the South China Morning Post in January. Many other firms in adjacent sectors such as merchandising, advertising and publishing also suffered heavy losses during the period.

“Chinese developers are likely to face significant challenges to monetise their games until the ecosystem is rebuilt again,” Kshetri  said.

In the meantime, frustrated gamers like Zhang can only wait in hope for a loosening up of the government’s grip on the sector.

He also hopes that the current turmoil will give the industry a necessary shake-up, ultimately leading to better quality games.

“The most important thing for multiplayer competitive games is the game environment, even more so than the game content, I think,” he said. “So if the game makers can give a better environment to the player, that will definitely make them happy again.”

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Analysis | Industrials' Long Coattails Can Carry the US Economy – The Washington Post

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If the US avoids a recession, or at least a deep one, it will most likely be able to thank industrial companies.

While demand on the consumer side of the economy is weakening, it remains solid in the manufacturing sector and, more important, appears to be sustainable even if shoppers cut back further. Consider the outlook from a few companies most people pay little attention to.

Eaton Corp. Chief Executive Officer Craig Arnold said variations of  “strong” and “strength” more than 45 times during a conference call with analysts on Aug. 2, and that’s not counting references to the dollar. “It feels positive, in some cases, too positive,” Arnold, whose company makes electrical gear for construction, power, autos and aerospace, among other goods. With a market value of about $60 billion, Eaton isn’t small.

Illinois Tool Works Inc., which is even larger than Eaton, said its organic sales were up 18% in July from a year earlier, the highest monthly growth rate all year. The company makes all kinds of products for the food service, test and measurement, welding, construction and auto industries, and most of those areas are “off to a really strong start in Q3.”

Companies as diverse as chemical maker DuPont de Nemours Inc., industrial distributor W.W. Grainger Inc. and a metal-bender like Arconic Corp. are saying the same thing: The manufacturing economy is sizzling.

“The industrial parts of the economy are certainly growing faster for us than the non-industrial parts right now,” said DG Macpherson, CEO of Grainger, which sells just about any industrial-related part or gadget you can think of.

While the strength of the industrial economy isn’t new, its ability to power through a downturn in consumer spending is a change from past cycles.

 “We strongly believe that the industrial economy will decouple from the consumer economy,’’ Scott Davis, an analyst with Melius Research, said in an email. “There’s just too much pent-up demand for projects and megaprojects that are based more on secular changes than cyclical.”

The reasons for this decoupling are multifold. An obvious one is the recovery of investment in the oil and gas industry. Although some industrial companies pulled back exposure to energy, especially in activity closer to the wellhead, after oil prices sank in mid-2014, the increase in drilling reverberates broadly through the industrial economy with increased demand for steel, construction, trucks and safety equipment.

Another is that the makers of autos and heavy trucks are still struggling to keep up with demand and have huge holes in their inventories that will take a while to rebuild. There were 95,000 cars in inventory in June, down from a monthly average of 660,000 in 2019, according to the Bureau of Economic Analysis. The number of Class 8 trucks, as the big rigs are known, in backlog as a ratio of the build rate was about 10 for the first six months this year, which is lower than last year when the computer-chip shortage was at its peak, but still higher than 6.6 in 2019, according to FTR Associates data. It’s the opposite problem from large retailers, which are grappling with too much inventory.Makers of commercial and private jets also have big backlogs to fill as people, restless from the Covid-19 shut-ins, are on the move again. Construction projects are moving forward, and even consumer-facing companies are continuing with projects to improve their logistics, an area where costs jumped during the pandemic.

The transition to cleaner energy also is also feeding the fire of industrial demand, and the climate change bill passed by the Senate over the weekend would keep those flames burning for some time — perhaps even through a consumer recession.

Eaton’s Arnold has positioned his company to ride the wave of electrical power demand as economies wean themselves off oil. The company has a long history of selling transformers and circuit breakers for power generation and transmission and recently made a push to become a key supplier to electric vehicle manufacturers. The company boosted its 2002 earnings-per-share guidance by 4 cents to a midpoint of $7.56 and increased its forecast for annual organic sales growth to as much as 13% from 11%.

“So despite all the talk about potential slowdown and downturn in the market, and we’ll be ready if we have one, we’re focused on investing to capitalize on what we see as the super growth cycle, driven by favorable trends in the recovery and some of our other end markets,’’ Arnold said on the call.

Eaton, DuPont and ITW, which raised its guidance in May, called out international weakness from the China lockdowns and Europe’s difficulties with soaring energy prices. Still, there are no signs the international weakness is bleeding over to the US. The year-over-year increase in US industrial production in June was more than 4%, a solid pace, and that comes on top of the big rebound of more than 9% in June last year.Ironically, the same supply chain snags that stoked inflation because demand wasn’t being met also kept a lid on the overbuilding of vehicles, homes, electronics and other goods that normally would occur and then cause a pullback in output. The trucking industry, for example, is notorious for the boom-and-bust cycles because companies buy too many trucks when freight demand is strong and then have too much capacity when cargo cools. Those truckers were never able to purchase all the trucks they wanted. There will be no big bust this cycle.

Add it all up, and it makes sense that the manufacturing industry can buoy the economy through a downturn in consumer spending.

More From Other Writers at Bloomberg Opinion:

• It’s (Still) Going to Be Hard to Get a Car: Anjani Trivedi

• Customer Demand Is There. Supply Still Isn’t: Brooke Sutherland

• New Chips Act Could Become a $280 Billion Boondoggle: Editorial

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, he covered U.S. industrial and transportation companies and Mexico’s industry, economy and government.

More stories like this are available on bloomberg.com/opinion

©2022 Bloomberg L.P.

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Statistics Are Mixed But On Balance Say The Economy Is Weak – Forbes

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If you listen to the White House, you hear that the economy is strong. Others will tell you that it has already sunk into recession. Such “analytical” differences are common at almost all times and almost always reflect the speaker’s political agenda more than any straightforward reading of the statistical evidence. These days things look more ambiguous than usual. Statistics offer ammunition for both views. The president can point, and he does, to the robust growth in payrolls. Those with a less sanguine view of things can point to among other things two consecutive quarterly declines in the nation’s real gross domestic product (GDP). Although the balance of the evidence points clearly toward a weakening economy, it is also fair to admit that the statistics paint a strangely mixed picture.

The Labor Department’s monthly employment report illustrates. On the positive side, the July survey of employers showed a striking expansion in payrolls, a gain of 528,000 positions. Private payrolls expanded by 471,000 positions. Though these are not record increases, they are nonetheless beyond most historical experience and far beyond where consensus expectations were. But in the same report, the survey of households showed July jobs up only 179,000. This tells quite a different story from the employers’ tally. The jobs gain was not only much smaller but was insufficient to overcome the June decline in jobs so that over the two months June and July the nation by this measure shed some 136,000 jobs.

Despite this contrast – still unexplained by the Labor Department – what tips the balance to the negative side is the flow of information from elsewhere and from the rest of the department’s monthly report. True, the unemployment rate dipped slightly from 3.6% of the workforce in June to 3.5% in July, but department also reported that some 538,000 people dropped out of the workforce in July. Since they are neither working nor seeking work, this movement more than accounts for the fall in the unemployment rate. What is more, the average weekly hours worked remained unchanged in July at 34.6, still down from April’s measure.

Outside the Labor Department’s accounting, there are of course the first and second quarter declines in real GDP, precipitous declines in consumer confidence, and reporting by the Institute of Supply Management (ISM) of slowing overall and an outright decline in the new orders part of the measure. This list of negatives is of course far from complete, but it is nonetheless indicative.

Apart from the current statistics that point to economic decline, two other considerations weigh heavily on the economy’s prospects. One is the ongoing inflation. At last measure, for June, the consumer price index (CPI) rose 9.1% from year-ago levels. This kind of price pressure seems likely to last. Even if it abates some — say to 8% or 7% — it will remain sufficient to impair economic growth prospects by eroding business and consumer confidence and discouraging the saving and investment on which economic growth ultimately depends. These effects could bring on recession all on their own. It certainly would not be the first time in history that inflation did so.

A still more potent recessionary threat emerges from the Federal Reserve’s (Fed’s) fight against inflation. The Fed began this effort last March. Before then, it had pursued a pro-inflationary monetary policy. It had kept short-term interest rates near zero and poured new money into financial markets buying bonds directly – mostly treasuries and mortgages – a practice the Fed refers to as “quantitative easing.” But since the March policy shift, the Fed has drained money from financial markets by selling from the hoard of bonds it had previously acquired and by pushing up short-term interest rates some 1.75 percentage points. While these are standard anti-inflation moves, they also restrain economic activity. What is more, the Fed seems determined to take further steps along these lines in coming weeks and months – a pattern that will make recession still more likely.

If this assessment is correct – and it does seem likely – then the statistics on which the optimists rely – including the White House – will turn negative in coming months. The evidence of economic weakness, if not outright recession, will become overwhelming. Whether this resolution of the economic picture takes place in the next month or two remains uncertain, but it is hardly likely that the ambiguities will remain in place very much longer.

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