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Firms involved in labour-intensive industries like textiles could be the first to flee China, a report says. Photo: Reuters

Coronavirus: clock ticking for China to stop foreign firms fleeing country, report says

  • Labour-intensive industries like textiles and heavy polluters likely to be the first to leave if Beijing does not restore confidence, scientists say
  • Exodus could result in China becoming a ‘hollow economy’, report says
China has less than a month to prevent businesses leaving the country in their droves because of the coronavirus epidemic, according to the latest estimate by government scientists.

Labour-intensive textile production, hi-tech electronics and pollution-heavy industries like metal smelting could be the first to leave if the government failed to contain the spread of the deadly virus by the end of the month, the experts said in a report published on Monday in the Bulletin of the Chinese Academy of Sciences.

“Because supplier replacement requires a time base and related capital investment, the costs associated with industrial chain transfers usually are relatively high,” it said. “Under the premise that domestic production can be restored in a short period of time, the impact of this epidemic on the external transfer of China’s industrial chain will be limited.”

After decades of economic expansion, the question of whether the “unprecedented epidemic” – as Chinese President Xi Jinping described it – will result in Chinese firms losing business to foreign competitors is a major concern for the global economy.

Days after Beijing declared a national emergency with countrywide quarantine measures to contain the outbreak that was first detected in Wuhan in December, US Commerce Secretary Wilbur Ross said it “will help to accelerate the return of jobs to North America”.

His remarks not only drew protests from the Chinese government, which said the country’s dominant position in the global production chain was unshakeable, but also criticism from political opponents in the US.

Democrat congressman Don Beyer wrote on Twitter on January 31 that “Wilbur Ross’ reaction to a disease killing hundreds is to talk about ways to make money off it”.

Professor Wang Shouyang, chief forecast scientist at the Chinese Academy of Sciences, the country’s largest scientific research body, used a mathematical model to predict the impact of the epidemic on the global value chain.

The risk of China losing jobs not only existed but could become a “black swan event causing the industrial chain to shift outward” and turn China into a “hollow economy” if the disruption to normal production and business activities continued after the first quarter, the report said.

“Affected by the epidemic, there have been cases of outward transfer of the industrial chain. Auto parts maker F-Tech has decided to switch brake pedals previously produced at its Wuhan plant to its plants in the Philippines,” it said.

“In the long run, the epidemic will accelerate the transfer of multinational companies from China to other candidate regions, and it is likely to change from the original ‘China + 1’ industrial transfer model to the ‘China + n’ model.

“The combined upstream and downstream effects of the overall migration of the industry chain may also exacerbate the risk of hollowing out our industry,” it said.

Industries such as textiles and clothing that depend heavily on low-cost labour could accelerate their reallocation to low-income countries, the report said.

Electronics and electrical equipment, transport equipment and other industries with low labour intensity, high technology density “may easily return to developed economies”, it said.

As Beijing has stepped up its efforts to reduce pollution in recent years, industries such as metal smelting and processing might also move out of China in favour of neighbouring countries that have less stringent environmental regulations, the scientists said.

Controlling the movement of people has helped to bring the epidemic in China under control to an extent. According to a report published on Saturday by telecommunications service provider China Unicom, just 70 per cent of Chinese citizens have returned to the place in which they were working before the restrictions were put in place.

Are temperature checks effective in stopping the spread of the coronavirus?

A report published by Worker’s Daily on Wednesday said that although more than 90 per cent of large-scale, state-owned enterprises had resumed production, about 70 per cent of private and small businesses were still closed.

The researchers said the government should adopt a series of measures to stop the outflow of businesses and jobs. These should include financial aid, securing face mask supply for employees in production sectors, tax cuts and fiscal stimuli to boost domestic demand over the rest of the year.

Chinese President Xi Jinping described the coronavirus outbreak as an “unprecedented epidemic”. Photo: Xinhua

A researcher who works for a government think tank in Beijing said the risk estimated by the report did exist, but business executives also needed to consider the potential outbreak of the coronavirus in other countries.

In some Western countries, such as the United States, there were growing concerns that the actual number of infected patients was greater than was being reported by the health authorities, the person said on condition of anonymity.

“This is a critical moment for China to rebuild confidence in its ability to control the situation. The unprecedented challenge may also come with an unprecedented opportunity.”

China keeps turning screw on civil liberties and free speech, report says

Larry Hu, chief China economist at Macquarie Capital, said that if the epidemic was not brought under effective control it would disrupt the global supply chain in the short term.

“I’m not so pessimistic about foreign companies shifting their production bases away from China,” he said. “Supply chain relocation concerns a lot of things: infrastructure, labour quality, etc. And it’s usually a multi-year process to make the move.

“It’s still too early to say if most multinationals are motivated to move away from China,” he said.

Hu Xingdou, an independent political economist in Beijing, said foreign companies’ relocation decisions were usually driven by changes in long-term fundamentals, such as human resources or policy environment, while the impact of an epidemic outbreak was relatively short-term.

“Foreign companies are likely to move their orders to factories in other countries, but unlikely to close their China production bases just because of the coronavirus outbreak,” he said.

Additional reporting by Jane Cai

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This article appeared in the South China Morning Post print edition as: Fears foreign firms will flee mainland
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