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10 Implications of the Coronavirus on the Chinese Economy

With parts translated from an article by 水木然

The 2019 novel coronavirus, known as COVID-19, has been in the headlines for a few weeks. The deadly virus originated from Wuhan, Hubei right before Chinese New Year (CNY), and has since spread over China and subsequently the world. As of February 21st, there are close to 75,000 people diagnosed to be infected by the virus, and a 5,000 more possibly infected. The number of deaths has significantly exceeded SARS, with official figures currently at around 2,200.

Response and containment of the contagion was swift and broad. Huge amount of resources, in money, healthcare staff, and medical supplies were poured into Wuhan from greater China. Two hospitals in Wuhan were built in matter of days, with the entire construction process live streamed. Cities in Hubei are completely locked down, with non-essential vehicles blocked from entering and exiting cities like Wuhan. Even outside of Hubei, most cities are under partial lockdown, with all forms of transportation strictly controlled. One measure to reduce contagion was that residential communities were instructed to handout passes that allow one person from each household to leave the community once every two days.

These measures were stringent but effective, with the number of newly diagnosed infections on a downward trend over the last 14 days. Another piece of positive news is the ongoing clinical trial of the Gilead drug Remdesivir. The drug was found to be effective in the treatment of COVID-19 in the lab, and was also effective on a patient in the US. Wuhan started conducting a double blind randomized trial with 700 or so patients at the beginning of February, with results pending. Many other western and eastern therapies are also being concurrently tested.

However, as the extended holidays end, China faces a significant challenge with returning students and workers. As people filter back to their workplace from their home cities, the risk of infection once again rises. As a result. the authorities are predicting another peak in infection in mid to late February. Whether that can be contained remains to be seen.

Economic Impact of COVID-19

Above and beyond the impact of the epidemic on the lives of Chinese and non-Chinese people, there are also significant commercial disruptions caused by COVID-19. During Chinese New Years, almost all restaurants were shut down to reduce the possibility of transmission. Popular attractions, such as Disneyland in Shanghai and the International Ice and Snow Sculpture Festival in Harbin were also closed. Demand for transportation, in particular domestic and internation air traffic reduced significantly, leading to many flight cancellations.

After the holidays, most companies, including multinationals like Foxconn were mandated to resume work at least one week later than normal, resulting in significant supply chain disruptions for both domestic and foreign firms. As companies resume operations, they are required to have disease prevention measures, such as masks and a 14-day isolation period. Even now, almost 3 weeks after the end of CNY, Foxconn remains not fully staffed.

The service industry continues to be disrupted weeks after CNY, with popular social gathering spots such as KTVs (Karaoke), restaurants, and clubs closed. One of the largest KTV chains, 魅KTV, with 50 locations across China, has reduced its capex budget, with plans of hitting 300 locations this year postponed. Another popular KTV spot, K歌之王, has cut its staff by 200. The CEO of 魅KTV estimated that it would be April before conditions normalize (南方都市报). As these small to medium sized companies stay closed, they must continue to pay rent and wages. Although there are some subsidies, it is not certain that all companies will stay solvent until normalization.

Schools were instructed to resume even later, with some, like Fudan University, pushing their start dates from February to March. For elementary and high school students, online education has resumed, with teachers live streaming their lessons to students.

Due to the containment efforts, COVID-19 gave rise to what’s known as home economy (宅经济) in China. A lack of entertainment and partial lockdowns during the extended holidays resulted in extreme boredom and heavy internet usage – mobile app downloads were 40% higher than average in the first 2 weeks of February. As schools remain closed, education is resumed through online means, and education app downloads doubled in February (Financial Times). Additionally, there was a sharp increase in video streaming, one of the most popular forms of mobile entertainment. Short-form videos experienced a ~5% increase in users and ~16% increase in time on the platform per user. Long-form videos experienced a ~1% increase in users and ~7% increase in time on the platform per user. On top of increased ad sales from more viewership, there was also an uptick of membership purchases, by up to ~1000% on some platforms.

Due to the closure of brick-and-mortar locations, entertainment options such as KTV and nightclubs tried to migrate online. Online KTV is facilitated by apps such as 全名K歌 by Tencent and 唱鸭 by Alibaba, and their userbase increased significantly over the period. Nightclubs also moved online with “cloud clubs”, where the businesses livestreamed their events over 快手 or 抖音. Some livestreams were surprisingly popular. The famous Shanghai club TAXX made 700,000 RMB with a 4 hour livestream, with viewers maxing out at 71,000. One Third bar made more than 2,000,000 RMB with a 5 hour livestream, accumulating 1,213,000 viewers. Almost every popular nightclub in first or second tiered cities has taken online, with events scheduled every night.

TAXX “cloud club”, where a viewer sent a gift (money) to the livestream.

The changes to people’s lives have also affected consumer behaviours, and these may have some long-term economic implications.

1. Accelerated displacement of traditional commerce by ecommerce

The chinese economy is already miles ahead in the adoption of ecommerce, compared to many western economies. Taobao (淘宝), the most popular shopping app, has 3B downloads on the app store, compared to 100M+ for Amazon. During the COVID-19 epidemic, most people had to purchase daily necessities, including groceries, online. This could change the shopping habits of many Chinese people who still preferred to shop at produce markets, where prices are slightly cheaper than supermarkets. As people download the apps and got accustomed to the convenience of grocery delivery, it will create stickiness where many will not switch back.

2. Accelerated displacement of traditional stores by experiential stores

A secondary effect of the switch to ecommerce, traditional brick-and-mortar stores will be increasingly displaced by product experiential stores. Stores will no longer have to carry inventory, and consumers will go to stores to experience the product prior to purchase. This is similar to the omnichannel experience that many retailers in the west are trying to implement. This is also complementary to the accelerated economic growth in the past decades, as Chinese consumers become richer, their needs will move from functional to experiential.

3. Accelerated displacement of traditional customer acquisition by online customer acquisition

Traditional customer acquisition methods such as handing out flyers and sales calls are still quite common in China. As consumers accelerate their shift to online services, marketers will need to respond with a redistribution of their customer acquisition budgets. This would also imply more spend on creatives, such as images, videos, or audio content. This may also mean working more with influencers, many of whom have up to tens of millions of followers on Douyin (抖音) (Chinese Tik Tok).

4. Accelerated displacement of traditional education by online education

With many schools, from elementary all the way up to university, pushing back their start dates, many schools resorted to using online teaching tools for distance education. Applications, like Xiaoheiban (晓黑板), allows students to watch lectures, do quizzes, and record answers. As students, parents, and teachers get accustomed to these applications, its adoption will be accelerated. These applications will also facilitate teaching at scale, where the number of students will no longer be limited by physical constraints like the class size. These tools will be particularly beneficial for students in rural areas, where schools are far from residences and quality educators are harder to come by.

5. Accelerated adoption of working from home

Popularized by Jack Ma’s 996, working (overtime) at the office is an important part of the Chinese working culture. However, there is a recent trend of working from home, partly catalyzed by the advent of new media jobs such as livestreamer or professional gamer. As working from home becomes more widely adopted, office rent may be negatively impacted while softwares that facilitate working from home, like 钉钉 (DingTalk) by Alibaba will benefit. Coworking spaces, similar to WeWork in the west, could also benefit.

6. Accelerated displacement of paid by free or freemium models

Movie theaters suffered greatly from COVID-19, as they were all closed to mitigate infection risks. One example is the widely anticipated film Lost in Russia (囧妈), which was set to show in theatres. Instead, it chose to distribute online, through a free with ads model. As the movie industry experiments with new distribution channels, other industries could also go a similar route, disrupting the traditional pay-per-action distribution model.

7. Reemphasis on healthcare reform

One key issue during the COVID-19 epidemic is the acute shortage of medical resources in Wuhan and Hubei. Every aspect of the healthcare system – hospital beds, drugs, medical devices, and healthcare professionals – were under significant stress. The core issue is the speed and accuracy at which healthcare resources can be redeployed in a crisis, for example, from Sichuan to Wuhan. There were significant healthcare reforms that allowed China to respond better than it did during the SARS epidemic, thus leading us to believe that further reforms is very likely pending. It is also likely that these reforms will require significant tech resources, and involve many private enterprises.

8. Accelerated transformation to smart cities

The containment measures during the COVID-19 were very labour intensive. For example, each residential community had 3 to 5 volunteers and public sector employees checking for symptoms at every entry point (typically at least 4). As the standard of living and labour costs rise, digitalization of city administration will also become more economically viable. This would include aspects such as traffic administration, supply chain, and emergency response, and will require significant IT spend, both in sensors as well as in software. For example, facial recognition is used at entrances to automate identity checks in many communities. AI-based predictive models in emergencies and best responses would be an optimal end goal.

9. More data-driven policy making and administration

With the acceleration of online shopping, education, and work, as well as the adoption of IoT in city planning and administration, policy making will also become increasingly reliant on data. Particularly in emergency situations where decision-making must be done under a high degree of uncertainty, data will help inform the best possible course of action in a timely fashion.

10. People will adopt a different set of values

In the modern Chinese society, money and status are the most important things to most people. Many sacrifice their health or relationships to earn more money. Along with a richer society, COVID-19 has shown people that there are aspects of life like health that are more important than money. Healthy lifestyles will become more valued, and with it services such as gyms, healthy foods, and sport activities.

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