As the novel coronavirus continues to ravage countries in the world, more than 55.4 million people have been diagnosed globally, and the cumulative number of deaths has exceeded 1.33 million; the current number of new cases daily are still as high as 500,000. In addition to being a threat to life and safety, the COVID-19 pandemic has also deeply affected the global economy. In 2020, most economies in the world are experiencing a significant contraction. The World Bank predicts that global economic growth will drop by 5.2% this year, and the European Union estimates that the economy will shrink by 7.8%. The pandemic in the United States has remained rather serious, and Europe has suffered from the re-lockdown due to the second wave of the pandemic. Judging from the current situation, only a few economies such as China and Vietnam are expected to maintain positive growth this year.
Figure: New Confirmed COVID-19 Cases outside China (up to November 16)
Source: Data from national government agencies and media.
After taking the lead in containing the pandemic, China has entered the process of economic recovery relatively early, providing a guarantee for the maintenance of its economic growth. From January to September this year, China's GDP grew by 0.7% year-on-year, the first time that it recovered. In quarterly terms, the first quarter was down 6.8% year-on-year, the second quarter was up 3.2%, and the third quarter was up 4.9%. The huge differences in pandemic prevention and control between China and other countries are manifested economically in the forms of completely different markets. In China, corporate production, business activities, and people's consumption activities have basically returned to normal, and the Chinese market is also normalizing. Researchers at ANBOUND have observed that the normalization of the Chinese market is having a new impact on multinational companies. In the early and mid-stage of the pandemic, multinational companies had a widespread "supply chain panic". They were restructuring their supply chain systems around the world because they feared that the supply chain would be too dependent on China. As it stands, with the Chinese market having regained its vitality, multinational companies are beginning to feel the benefits of such normalization.
A simple and strong evidence is that the business of multinational companies in China has begun to recover quickly, and China is becoming a rare profitable market in the current global market. For example, FANUC, the Japanese industrial robot giant, recently raised its net profit valuation for the current fiscal year ending on March 2021 by 1.08 times, and revised its forecast for the full-year net profit decline from 52.97% to 2.14%. The primary reason for FANUC's adjustment was that its main robotics business revenue in China in the third quarter has increased by 70% to JPY 19.9 billion, which is higher than before the outbreak of the U.S.-China trade war. Judging from the new orders, FANUC's business in China will continue to grow strong in the fourth quarter, which is significantly better than the rest of the world.
Likewise, Japanese construction machinery manufacturer Komatsu saw its sales growth only in the Chinese market in the last quarter. Komatsu expects that as revenues in Japan and the European and American markets decline throughout the year, its revenue from China will continue to grow, being the largest increase in all regions. Hitachi Construction Machinery, whose business is similar, is developing products that meet the needs of Chinese construction sites, and is also seeking to share growth in the wave of China's economic stimulus and expansion of public investment. Murata Manufacturing revised its net profit forecast for the current fiscal year from a decline of 18% to an increase of 3%; the main reason being the recovery of Chinese demand exceeded its expectations. Its Representative Director Tsuneo Murata frankly stated that "the Chinese market is recovering very fast." The cosmetics brand Shiseido recently stated that only the Chinese market saw revenue growth in the second and third quarters this year, and it is expected that the Chinese cosmetic market will return to pre-pandemic levels in the second half of this year, while the Japanese market will have to wait another year, and European and American markets will have to wait until the second half of 2022.
The normalization of the Chinese market has also impacted American companies in China. For some American companies, setting up an office in China may help them withstand the impact of the coronavirus pandemic. Data from Standard & Poor's shows that this year's S&P 500 earnings have dropped more than 16% from a year ago. While the rest of the world shrinks, China still achieves growth this year. Greg Gilligan, Chairman of the Beijing-based American Chamber of Commerce in China, said that regarding multinational companies in the United States, as the Chinese economy is recovering, the institutions of multinational companies in China are under performance pressure from their headquarters. It is expected that in the next fiscal year, their Chinese departments will need to bear a heavier burden.
According to a survey conducted on more than 6,600 companies in 12 countries by information provider IHS Markit at the end of October, it was found that Chinese companies had the highest recovery rate, followed by American companies. The report data shows that the recovery period for Chinese companies is 2 months while the American companies required 3 months, and the average recovery period for 48% of the global companies is 5 months. Matt Margulies, vice president of the US-China Business Council in charge of China business, said that many of its members achieved satisfactory growth in the third quarter, which once again emphasized the importance of the Chinese market to the entire company. Something to take note of is that under the pandemic, the current business strategy of many American companies is "in China, for China", which means that their production in China is to sell the products to the Chinese market, and rarely to export to the United States. In the shopping season from November 1 to 11 in China, data from Alibaba shows that the total value of products from brands such as Apple, L'Oréal, Estee Lauder, Lancôme, Nike and Adidas each exceeded RMB 100 million (about USD 15.2 million). The rapidly recovering Chinese market is becoming more and more important to many large international companies.
However, China's economy is not as optimistic as its success in the containment of the pandemic. Many endogenous deep-seated structural problems have been continuously exposed, such as the recent detonation of state-owned enterprises' defaults, increased debt, accumulation of systemic financial risks, continued deterioration in business operations, and overall tight local finances. All these are indications of the complexity of the country's economic issues. However, because of the numerous internal economic structural problems, it is extremely important to stably attract foreign investment and help foreign investment develop smoothly in the Chinese market. Foreign capital is not only a stabilizing force in the Chinese market, but also a channel connecting the Chinese economy and the global market. Data from the U.S. Bureau of Economic Analysis (BEA) shows that in 2018, the majority of American multinational corporations in China generated sales of USD 392.7 billion, an increase of 4.8% over the same period in 2017. In 2018, the employment of U.S.-funded companies in China fell by 1.7% from the previous year to 1.69 million, but they were still able to maintain sales growth. Policy wise, if these advantages can be used to allow foreign investment to fully enter China's market, then the country's "dual circulation" strategy will include such investment which will also become an important force in stabilizing China's economy and maintaining openness.
Even under the impact of COVID-19 this year, China has maintained its momentum of attracting foreign investment. According to data from the Ministry of Commerce of China, from January to October 2020, the country's actual use of foreign capital was RMB 80.68 billion, a year-on-year increase of 6.4% (equivalent to USD 115.09 billion, a year-on-year increase of 3.9%). In October, the country's actual use of foreign capital was RMB 81.87 billion, a year-on-year increase of 18.3% (equivalent to USD 11.83 billion, a year-on-year increase of 18.4%), achieving a year-on-year growth for seven consecutive months. In addition to attracting incremental foreign investment, it is also crucial to create a good developmental environment for the stock foreign investment. To a certain extent, since the stock foreign investment has entered the Chinese market, they have played an important role in supporting the Chinese economy.
In order to better maintain the development of foreign capital like those of multinational companies in the Chinese market, China needs to take advantage of its leading position in responding to the pandemic, focus on the opening of higher standards in the era of Globalization 2.0, as well as promote domestic market reform and rule establishment. Some areas that can be prepared and optimized in advance include increasing market access and opening, strengthening intellectual property protection, adjusting compulsory technology transfer policies, improving the level of rule of law in the Chinese market, and advancing truly universal national treatment. In addition, while the pandemic situation in Europe and the United States is still severe, China can provide convenience for foreign-funded enterprise administrators to enter the country on the basis of strict pandemic prevention.
Final analysis conclusion:
The difference in the prevention and control of the COVID-19 pandemic and the return of economic activities to normalcy have prompted China's economic recovery and increased the importance of foreign capital on the Chinese market. When China emphasizes the domestic circulation, it must not neglect to increase its opening-up and internal reforms. If the advantages of the Chinese market can be used to attract and stabilize foreign investment, it will be possible for the country to successfully incorporate foreign investment into its "dual circulation" strategy.
