China’s Industrial Reboot Runs Into the Global Coronavirus Shock

(Bloomberg Businessweek) -- Across China, factories that produce everything from smartphones to sneakers have been dormant since the Lunar New Year holiday in late January as the nation battled to contain the spread of the new coronavirus. Now plants are slowly coming back online, prodded by President Xi Jinping and other top Chinese leaders who worry that an extended shutdown will jeopardize the government’s lofty development targets for 2020.

Economists are tracking energy consumption, poring over pollution charts, and studying data on traffic movements to discern how quickly the world’s second-largest economy can get back to business. Bloomberg Economics has estimated that the economy was operating at as much as 80% of normal capacity as of March 6.

Millions of migrant workers who were left stranded by restrictions on travel imposed after the start of the January holiday are being allowed back into the megacities along China’s east coast. They have to endure quarantines when they get there, but back they are going. About 78 million have returned to work, which is about 60% of those who went home for the holiday, and almost all will have returned by early April, the government said in early March.

Given the extent of the virus controls, it will take time to get that many people back on the job. At one stage the cheap-and-cheerful long-distance buses that ply China’s highways were allowed to travel only half full as part of an effort to prevent contagion.

Economists have long suspected that China fudges its statistics, and so they have become accustomed to tracking proxies for economic activity, such as energy consumption. The use of coal burned to generate electricity has been steadily ticking up and is now approaching normal levels for this time of year.

But, as ever, some are trying to game the system. In Zhejiang, a province on the east coast that’s a manufacturing powerhouse, at least three cities gave factories targets for power consumption because they’re using the data to show a resurgence in production, according to people familiar with the matter. To comply, some plant managers turned on all the lights and ran machinery as if they were operating at full capacity.

Just as China’s factories are beginning to get back on their feet, they face a second blow: the spread of the disease and the associated risk of a collapse in economic activity in the major developed economies that are their main customers.

Can you trust the data?

Manufacturing companies across China told Bloomberg News that the emerging challenge is now demand, not supply. “We are actually more worried about the development of the epidemic in Europe and the U.S., which will affect their domestic consumption,” says Mark Ma, owner of Seabay International Freight Forwarding Ltd., a company in Shenzhen. About a third of the goods it handles are sold on Amazon, he says.

David Ni runs a company in Nanjing that buys aluminum alloy car wheels from Chinese producers and exports them to retailers in the U.S. He was planning to showcase his products at the Inspired Home Show in Chicago in mid-March. But the trade show, like so many others, has been canceled. “I’d booked hotel, flight ticket, and a booth—everything was ready,” says Ni, who’s based in Los Angeles. “But seeing the situation in the U.S., I began to feel afraid of going on business trips.”

There’s also a risk that the outbreak in China isn’t really under control. Although government statistics show a marked decline in the number of new infections registered daily both in Hubei province and in the rest of the country, there are suspicions that authorities are manipulating the data, as case numbers have been repeatedly revised through the course of the outbreak. Also, health specialists have warned that the country could experience a resurgence in cases as factory staff return.

No matter how quickly life returns to normal, China is facing its first quarterly economic contraction in decades and the weakest year since the early 1990s. But though unemployment is likely to rise, it’s starting from a relatively low level of 5.2%, and there’s no evidence of widespread job losses yet. That explains why there’s been little talk yet of a stimulus package on the scale of the one Beijing cobbled together in response to the 2008 global financial crisis, which equaled about 12% of the size of the economy. That may change as the machinery of government, also disrupted by the virus, resumes working.

To contact the editor responsible for this story: Cristina Lindblad at mlindblad1@bloomberg.net, Malcolm Scott

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With assistance from Bloomberg