02.10.20 - As China continues to scramble to react to the Coronavirus, the economic consequences are getting worse. With entire provinces shut down production and global supply chains are threatened and lie in disarray. Before the launch of the trade war China was already slowing, the trade war and US tariffs caused another inhibitor on China’s growth, and now a health crisis is adding even further pressure.
The chinese economic miracle isn't a miracle, it was built on the unstable bedrock of debt and government subsidies, something that Beijing has been trying to reign in over time. The Chinese province of Hubei, where Wuhan the epicenter of the outbreak is located accounts for 9% of Chinese auto production and approximately 3.5% of demand. According to Goldman Sachs analysts estimate that if production stops for 2 weeks output will drop around 8% this quarter. However, this is actually imposing fiscal discipline on an over producing auto sector. China’s factories have the capacity to produce over 60 million vehicles a year, but only a third of these vehicles are sold.
Cars have been piling up with continuously declining demand for the past 3 years. Production hasn’t decreased in accordance with demand because the Chinese government has given hundreds of millions of dollars in subsidies to keep failing manufacturers alive. In June of 2019 Chinese auto dealerships were sitting on $72 billion of unsold inventory even with steep price discounts to reduce the backlog. In 2018 more than half of Chinese dealerships reported losses and 85% did not meet sales targets. Beijing has been hesitant or unwilling to impose needed supply side structural reform in cutting excess operating capacity.