China sneezes, and Asia catches a cold.

There was a phrase that was widely used to describe the economic power that the United States commanded- “US sneezes, and the world catches a cold”. In more recent times, this phrase has been modified to - “China sneezes, and Asia catches a cold”. What's a better time to talk about this than today, where the COVID19 pandemic has swiftly transformed this metaphor to reality. 

An important aspect of this “cold” that the world economy has caught, with the onset of the COVID19 pandemic, is that it is primarily backed by the vulnerability that the Asian business cycles were already facing. For example, in a survey published by the International Monetary Fund, economists analyse that the global growth in 2019 was of a meagre 2.9 per cent, which is just shy of 2.5 per cent- the threshold that is typically associated with a global recession. On the forefront of this slowdown remained the tensions related to geopolitics and trade, and also the increasing weakness in the manufacturing activity- to levels that have not been witnessed since the global financial crisis. In the midst of this, it was absolutely imperative for ‘2020 to be our year’, as we millennials often say. (It has been three months and I am ready to cancel this year)

“China sneezes, and Asia catches a cold” is a very appropriate metaphor considering economies of South and SouthEast Asia are directly affected by shocks in the Chinese market. 

For this, there are three channels: Firstly, by the reducing number of Chinese tourists. Several South East Asian countries are heavily dependent on Chinese tourism, as a result of which, travel bans in China, particularly hit the transportation and hospitality industries in countries like Thailand, Indonesia, Philippines and Vietnam. The Asian Development Bank (adb.org) formulated a comprehensive graph of the share of tourism accounted for by China in the Southeast Asian region, using data from the World Tourism Organisation:

Secondly, disrupting China-centric supply chains: A lot of us find comfort in comparing present situations with something familiar, in the case of COVID19, that’s the SARS epidemic. But one has to admit, since SARS hit in 2002 and 2003, the world has grown more dependent on China, while China has become less dependent on the rest of the world, creating larger than anticipated domino effects on the rest of the world. And finally, by dampening the demand in mainland China, the virus exposes a heavy Chinese dependency in the South East Asian growth models. In the face of the Coronavirus, one is beginning to understand the impact of the Chinese economic integration from a global trade perspective, as it holds an important position globally,  in terms of supply and demand. 

In today’s world, the concept of people and technologies that are involved in the production of a good and its supply (including distribution and post sales activities) when they are to be coordinated across geographies, contribute to what is called the Global Value Chain. In this context, these Global Value Chains have made their participants very codependent- so although they rise together, they also fall together. 

Now, this Global Value Chain doesn't have to be as complex as it sounds, it may not be associated with something heavy duty like an airplane whose parts are sourced from different parts of the world, assembled in a different geographical location. Consider a jar of Nutella, which has a value chain that spans across Turkey, Malaysia, Australia, Brazil, Italy and France. 

Similarity, a very good example of disruptions in value chains because of the pandemic is Hyundai, one of the worlds largest automobile companies, gets a lot of its parts from China. So amidst the COVID19 outbreak, in February, Hyundai announced that it was temporarily shutting down its production at factories in South Korea, because of shortages of these Chinese parts.