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Monday, February 10, 2020
Epidemic Will Force China to Redirect Its Focus Inwards
ANBOUND

For the longest time, China's economy has been booming hastily. The act of deep engagement and globalization had resulted in country's long years of economic golden age. When China became a member of the World Trade Organization (WTO) in 2001, the country's GDP was a mere RMB 10 million. As of late 2019 however, China's GDP stood at RMB 100 trillion. In the span of 18 years, the country's GDP skyrocketed by 900%, a rare feat in the history of world economics. China's participation in globalization not only spelled the act of the country opening to the world, but also the perpetual process of globalization in the country itself, through the absorption of foreign capitals, technologies and knowledge. In becoming the "World Factory", China begun "setting foot to the outside world" too, Today, its business foreign interest continues to increase massively, it has made a large amount of foreign investments and most importantly, Yuan is increasingly becoming internationalized. Considering all that has happened, China had planned to take active measures to safeguard its overseas interest too. With the country's "The Belt and Road Initiative" set in stone, the country was shifting its focus into expanding and developing its overseas military base.

Yet all of that is slated to change with the coronavirus epidemic that took place earlier this year in 2020, which has forced China to slow down its globalization attempts and readjust its pace. With the epidemic affecting the country, ANBOUND researchers believe China may be facing more problems internally for the next year or two, all of which poses a detrimental effect towards the country's development and slows the pace of the country's growth due the need to correct the mistakes left in the wake of a speedy development. To put it simply, China would have to pool its focus on to developing the country internally, and not externally. Since setting foot into the 21st century twenty years ago, China has faced multiple catastrophes. The SARS outbreak from 2003 gave the country a wake-up call in the awareness of public health. Meanwhile, 2008's Sichuan Earthquake incident took the lives of many and brought great loss to China. Despite the two catastrophes that have happened however, China remained deeply rooted in the golden age of globalization and did not experience a slowdown in pace in its economic growth.

The 2020 Wuhan Pneumonia marks the third time China has come face-to-face with a catastrophe in the last twenty years, and the second time it has faced a major public health issue since the past seventeen years. The bigger question however, is if this round's catastrophe would cause a huge blow to China's economy, or would it not? From a long-term perspective, it does seem that the coronavirus epidemic would not cause a decline in the country's economy in any way. Short-term however, it is obvious that the epidemic has caused both, China's internal and external development environment as well as the state of development to change drastically. There are three main reasons for that.

1. China has undergone major changes in its geopolitical environment, with the main one being the drastic change in its relationship with the U.S. Presently, China has gone from a period of strategic opportunities to a period of strategic competition, and the effect is expected to persist for the next decade, perhaps even longer.

2. China's geo-economics is going through certain changes too, with the most obvious changes being that its globalization attempts are disrupted and trade frictions have intensified, particularly the U.S.-China trade war that is being targeted at China, thereby resulting in a three-way battle involving trade vs. technology vs. finance.

3. China's economy is beginning to show signs of declining, it is experiencing a long-term slowdown and is undergoing a structural transformation, which has subsequently led to several structural contradictions.

Taking a walk down the history lane and assessing the Wuhan Pneumonia, ANBOUND has reason to believe that the epidemic may be a "catalyst" in causing China's economy to decline further. According to an earlier assessment done by the ANBOUND, the impact towards China's economy would be 0.5-1.2 percentage point in case that it moves in normal trajectory. Given the circumstances, China's current scale of economy could not possibly be compared to its past states, though the challenges it will face is surely greater than before. In 2019, China faced and still is facing two great challenges – the U.S.-China trade war and internal economic issues (consisting of economic slowdown + structural transformation + debt-related risks). 2020 has brought a third challenger to the table – the novel coronavirus pneumonia epidemic. What's interesting about the epidemic, is that it could be a new shock factor that would add on to the pressure posed by a myriad of existing internal economic issues.

Given the current stakes, it's hard to imagine that China's economy would remain unaffected as before, and that it is able to maintain an aggressive stance both internally and externally. To put it simply, from hereon, there is a need for the country to reexamine its bearings and stronghold as well as conduct a reallocation of its resources, both internal and external economies. Days ago, International rating agency Fitch Ratings had stated that following the outbreak of the novel coronavirus pneumonia, China's international presence may weaken severely, as the epidemic would affect the country's name on an international level. There are two reasons to that, one being that China would have to shift to its focus internally and two, foreign countries will turn their attention elsewhere. In one of Fitch's reports, Global Head of Sovereign Ratings James McCormack expressed that China's current political priority is to develop and implement strategies to better cope with the epidemic, which will be time-consuming and consequently lead to a massive depletion of resources. Quoted from Fitch Ratings, "Given the unforeseen circumstances that China is experiencing, it is hard to imagine that country would prioritize any international interests at least for now. For the time being, Chinese policymakers are expected to pool their efforts internally." To a large extent, Fitch's view represents the view of foreign investors and international institutions, and accurately portrays the tough spot that China is in. To the Chinese government, what concerns them is Fitch's mentioning that "foreigners are turning elsewhere". From ANBOUND's perspective, there are two facets to the shift – The international community's perception of China has changed, and fellow foreign investors perceive the Chinese market differently now too. There are incremental signs that multinational companies are reassessing China's position and risks in the global supply chain and behind all that concern and fear, lies a potential wave of withdrawal
in foreign investment.

Foreign analysis conclusion:

The coronavirus pneumonia epidemic faced by China at the start of 2020 could very well pose further troubles to China's list of existing economic problems. Under such pressures, the country is likely to turn its focus inwards, particularly towards development strategy and development focus. As it stands, it is imminent that China will have to halt its act of "going out", economic and geopolitical relationships-wise.

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