China economy enters vicious circle as business cuts crush demand

Nikkei
(ĐTTCO) - Survival measures by cash-strapped companies mean less money in consumers' wallets

A woman wearing a face mask cleans the entrance of a shop in Beijing on April 17. The coronavirus outbreak has hit China's domestic demand hard.   © Reuters

A woman wearing a face mask cleans the entrance of a shop in Beijing on April 17. The coronavirus outbreak has hit China's domestic demand hard. © Reuters

Lured by thriving tourism in his hometown Chongqing in Southwestern China, Li Yi last year used a big chunk of his savings to start a bed-and-breakfast business. But two weeks after his venture kicked off, Li's BnB overlooking the Yangtze River was hit by the coronavirus outbreak, which has killed nearly 4,700 people in China and infected tens of thousands more.

After no income for two straight months, Li was more than excited to reopen his business in April -- but he soon realized another challenge lies ahead.

"I knew the demand could be bad, but I didn't expect it to be this bad," Li said. In the first two weeks of this month only two out of 11 rooms were occupied, even with Li offering a 70% discount. The rooms were fully booked before the coronavirus crisis.

"People in China are still afraid of going out," lamented the 38-year-old, who has let go of one cleaner and more than halved another's salary to the minimum 1,350 yuan ($190). "I think we will see a comeback in tourism next year in the best-case scenario."

Li is hardly alone. Even though life is returning to normal in most Chinese cities, the suffering for hotels, restaurants, factories and many others is far from over, with many already going out of business.

Owners like Li have tried to hang on by cutting salaries and laying off workers, but economists worry those self-rescue measures will create a vicious circle: As Chinese workers get paid less, they will spend less, weighing on the prospects for retailers, hoteliers, and other industries.

At stake is Beijing's hopes of reviving the economy through domestic demand -- which had started to become more important as the government attempted to rebalance the economy. Consumption contributed to nearly 60% of China's growth last year as traditional engines such as investment and exports lost steam.

Data on Friday revealed that in the first quarter of this year, China's economic output slid 6.8% compared with the same period of last year -- the first negative growth in nearly three decades. Chinese leaders blamed a monthslong lockdown as the country scrambled to curb the spread of the virus, and say a rebound is on the horizon.

But the weeks of suspended economic activity, together with additional expenditures required to restart production, has already killed off many cash-strapped companies. The resulting job losses, income cuts and worries over a dim economic outlook are creating weak spots in China's demand for goods and services, leaving many fearing a longer-lasting downturn.

"China now relies more heavily on domestic demand and household consumption -- the new pillars of its economy that have been hit hard amid the COVID-19 pandemic," said Bruce Pang, head of macro and strategy research at China Renaissance Securities in Hong Kong.

Natixis in Hong Kong said: "The worst of the coronavirus contagion might have already passed in China, but the economy will still be under pressure as regards how to resume consumption demand, for which positive growth in disposable income will be needed."

Jay Chan, a dentist in the southern Chinese city of Dongguan, knows this better than most. Patient numbers have been down more than 70% since his clinic was allowed to reopen in April. "Customers are reluctant to come unless it is something urgent. We are burning money every day," Chan said. The slower-than-expected recovery has forced him to trim three out of eight nurses' jobs.

"We will have to let go more people if things do not improve in the next few months," said Chan, who is also tightening his belt. The father of three used to take his family on an overseas vacation twice a year, but this year he has no travel plans in mind even if the pandemic ends. "It is a very tough time and we are struggling," he said.

Ye Zhenqing, a factory owner in Wenzhou in eastern China who exports sunglasses to Europe and the U.S., has also felt the pinch as nearly two-thirds of his orders were canceled amid the pandemic. Ye asked all 100 or so employees to take a 30% pay cut and work only half days, and paid compensation to 10 who agreed to quit.

"I will keep the factory running until July. If the situation is not improved by then, I'll have to close the factory for three months," Ye said.

Zhou Dewen, the chairman of the Small and Medium Business Development Association in Wenzhou, estimates that one out of five export-oriented factories in the city has gone bankrupt or frozen production.

"The business closure could be worse than that during the global financial crisis in 2008," Zhou said. He expects many companies that have suspended operations may never come back.

All this has taken a toll on China's job market. In March, the China Statistics Bureau reported an unemployment rate of 5.9%, an improvement from last month but still the second-worst since the monthly survey started in 2018. Compared with the annual unemployment rate, it is the second-worst since 1994.

Even many lucky enough to keep their jobs have taken a hit from the coronavirus crisis. Xiao Yu, a businessman with four restaurants in Chongqing, did not fire any of his 80 employees but asked all to take a pay cut of as much as 50%.

"We have no choice," Xiao said. "Even though we managed to reopen our restaurants earlier this month, fewer diners came in. The transaction volume is only half of what it used to be and we still cannot make ends meet."

With many Chinese companies, big and small, taking similar measures, economists are painting a gloomy picture for the months ahead.

"China's household debt has already climbed in recent years. With an uncertain future ahead, consumers could be more restrained in their spending, which is a problem for Chinese companies," said Pang at China Renaissance Securities.

Mark Williams, chief Asia economist at market intelligence firm Capital Economics in London, said China's economic recovery was already showing signs of stalling because of low demand from consumers and companies.

"Conditions won't necessarily get better just because people are returning to work. A lot of people have lost their jobs, or their employers have stopped paying them because their revenues have collapsed. If people are not spending, many more firms will go out of business over the next few weeks," he warned. "Depressed demand is going to be the key factor holding back the recovery over the next few months."

To reboot domestic demand, government authorities in cities from Changchun in the north to Guangzhou in the south have offered five billion yuan ($704 million) in vouchers to encourage shopping, dining and traveling. In March, China's retail sales fell nearly 16% from a year ago, with merchant sales down 12% and revenue from restaurants almost halved.

Pang remains cautious about the impact of these vouchers. "It will help boost consumption, but it may not be sufficient to turn the tide," he said. "After all, many people still do not feel safe to go out. Saving money or saving your life, which one is more important?"

Li, the BnB owner in Chongqing, is equally worried. He already missed out on the Chinese Lunar New Year holiday, which traditionally accounts for one-quarter of annual revenue in the hospitality sector. With a sluggish recovery likely, Li said he has begun trimming his own spending, cutting out weekly restaurant and cinema trips.

"I can't afford it anymore," he said. "Some believe we will see pent-up demand in the post-coronavirus era, but I think that is impossible. Everybody is struggling now. Who has the money to spend?"

Nikkei

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