ESG Trends

Small Businesses a Big Problem for China

Mandy Chong, MioTech Team2020-03-07

China’s small to medium sized businesses are under tremendous pressure to survive since the outbreak of the coronavirus. As the contagion spreads and these businesses suffer, it could leave lasting impacts on the country’s economy.

You know things are looking bad when casinos start shutting its doors for business. Ever since the outbreak of the Coronavirus, it’s cost over 3000 lives, with more than 80,000 people infected in the mainland, and it’s showing no signs of stopping. 

China’s struggle to contain this fast-spreading virus, is coming not only at the expense of human lives, but it’s creating deep concerns about the impact this outbreak will have on the country’s economy, especially for many small businesses that will bear the brunt of this crisis.

Shutting Down

Wuhan, situated in Central Hubei, is the epicentre of the outbreak. The city of 11 million in population has effectively been in lock down since late January, with other surrounding cities also being imposed with strict travel bans, leaving an approximate 60 million people locked in. In efforts to further contain the virus, China has cautioned residents across the country to avoid leaving their homes. 

On top of the sweeping travel restrictions, the timing of the virus dampened the most auspicious time of the year for the Chinese, the Chinese New Year, not to mention retail sales during what would usually be a time of great commercial activity. 

The contagion has caused many popular tourist attractions, business, schools, factories and entertainment venues to shut its doors during this critical time. According to a report by the Caixin Global, the outbreak brought about losses of more than 1 trillion yuan to the restaurant, tourism and movie industries in the first seven days of the Lunar break.

The group most likely vulnerable economically to this epidemic will be the tens of millions of small businesses - fundamental to the country’s GDP and social stability.

The further imposed extension of the New Year holiday by the government in efforts to contain the outbreak means further delay to businesses running. Some fear that their jobs and livelihoods are at risk.

With major disruptions on consumers and businesses nationwide, economists are ancitipating a bruising first quarter, which could potentially damage full-year growth, on top of a slowing economy. Some even fear that it could have an ever more damaging economic impact than SARS.

SARS vs Corona on Economy

In order to understand the potential economic impact the new virus would have on the local economy, analysts and investors often compare the worldwide outbreak of SARS in 2003, to that of what we’re facing today.

According to the National Bureau of Statistics in China, the SARS epidemic saw China’s growth slide from 11.1% year over year in the first quarter of 2003 to 9.1% in the following 3 months. According to various estimates, China’s growth back then dropped by 0.5% to 1%. But the country was quick on the rebound, registering an annual growth rate of 10% - quicker than the 9.1% of 2002, according to Rifinitiv.

But China isn’t like it was back then. The then 6th largest economy is now the 2nd largest in the world just after the United States. The International Monetary Fund estimates that China alone accounted for 39% of the global economic expansion in 2019, which means the losses and impacts of this virus on the global economy will correspondingly be heftier. 

Several economists and analysts have downgraded their GDP forecast for China in 2020 by 0.2 to 0.7 percentage points - to as low as 5% for the year.

Not only does China have to combat an already slowing economy that grew by just 6.1%, the slowest expansion since 1990, exports have come under intense pressure from the past two years of trade war with the U.S.. And now with production shut down in many parts of the country, supply chains are being disrupted all over the world. 

The key economic driver for stable economic growth is also coming under threat - domestic consumption. According to Refinitiv, retail sales during SARs dipped to 4.3% in May 2003 - the slowest pace on record. Retail is most likely to take a hit during this period, which in turns puts a potential 30 million small and medium-sized business at risk.

Small Business to Suffer

According to government statistics published last September, smaller companies in China contribute to more than 60% of the country’s GDP and they’re currently the most at risk as they rely on constant flow of business to survive. 

In a survey conducted by researchers from the Tsinghua and Peking Universities on 1,079 local companies, over 80% of small companies (defined as having less than 300 million yuan in total assets) said they expected to generate less revenue in 2020 than in the last year due to the current situation.

Compared to state-owned enterprises who have access to cheap credit and resources, more than 40% of private companies don’t have the financial capabilities to last longer than 3 months without steady income, according to a survey by the University of International Business and Economics in Beijing. 

Throughout the country, small businesses which create more than 90 per cent of new jobs, are preparing for the worst to keep afloat. They’ve started laying off staff, not fully paying or not paying staff at all or imposing less leave if they work from home.

If the situation worsens, China could not only have to grapple with containing the virus, it would also have to contain a surge of unemployment. At the height of the SARs epidemic, according to Chinese data, 8 million people lost their jobs and this does not include migrant workers in China. 

The authorities have recently pledged to prevent mass layoffs. The Central Bank has injected more than 1.2 trillion yuan back into the economy to maintain liquidity in the banking system and stability in the currency market. 

The Central bank has also provided medium-term funding to commercial lenders and cut interest rates on loans in attempts to cushion the impact of the Coronavirus. 

The PBOC said it was lowering 200 billion yuan worth of one year medium term loans by 10 basis points (bps) to 3.15% from 3.25% previously.  The central bank also injected 100 billion yuan of funds with seven-day reverse repurchase agreements, even when a total of one trillion yuan worth of existing repurchase contracts were due to expire.

This is paving the way for a reduction in the loan prime rate which will lower borrowing costs and ease financial constraints on virus-hit businesses.

Local governments in the big cities as well as several provinces have also introduced measures to specifically help small businesses tie over. They’ve rolled out subsidies to landlords in order for them to reduce rents and have given formal permission to small companies to defer payment of social security contributions or taxes.

Whether or not these governmental efforts are providing any reprieve for small business, it’s still early days. While it might cushion the blow in the short term, economic problems could still persist for longer. 

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