China: Navigating an Economic Reboot

This post is part of a series from Asia Unbound. The post is authored by Juliana Kua, alumna of Stanford Graduate School of Business, Christopher Thomas, recently retired from McKinsey & Company and now a visiting professor at Tsinghua University, and Xue Wu, alumnus of Stanford Graduate School of Business. 

Headquartered in a country early to exit from the first wave of COVID-19 infections, Chinese companies have both the benefit of getting back to work earlier, and the challenge of having no roadmap to follow in navigating an unprecedented economic shutdown. With more than 75 percent of Chinese companies fully back to work by now, leaders of privately-owned companies in the mainland are tackling three problems in parallel: keeping employees safe, scrambling in the short-term to survive as revenues collapse, and answering existential questions about their place in a permanently changed world. In attacking these problems, two uncertainties loom—first, when and how demand will rebound in China, and second when the rest of the globe will get back to work. The latter is more important to Chinese businesses than those in the United States, as China remains the “factory to the world.” As one tech company CEO explained, “In February my European and American customers were demanding immediate products and placing new orders while my Shanghai factory was shut down…and then in March as I restarted production, all those overseas orders were canceled.”

With lockdowns relaxed, an initial need was getting employees back in the office and on the factory floor. Chinese companies needed to get millions of migrant workers from the rural areas to the cities – at a time when these workers had huge fear of contagion. Enterprising business owners hired buses, picked up their workers from their rural homes, and then transported them to urban areas with dedicated quarantine facilities (for the minimum mandated fourteen day stay). In going back to work, governments are allowing local flexibility in worker safety procedures – the three universal rules are follow the fourteen day quarantine, register all personnel entering and exiting sites, and wear masks. Certain municipalities, such as Beijing, have more rigorous rules, such as mandating no more than 50 percent of office employees to be onsite, and that meeting rooms never hold more than eight people. Wuhan is routinely testing all public sector workers in sensitive roles, such as those working with the elderly. Interestingly, few private companies seem to be rolling out universal testing, with one CEO mentioning, “I don’t even know where I would get tests if they were required.” Most executives see the biggest contagion risk among office workers, as their factories are automated and require few personnel. While workers’ health remains important, most executives seem to trust a vigilant government with strong “track and trace” capability. At the same time, they are resigned to the potential that an employee could test positive, which would lead to “two weeks of chaos as we put everyone into quarantine.”

While worker safety procedures are clear, executives have less clarity around the path forward for both the local and global economies – and the impact specific to their business. Everyone to whom we spoke agrees that there is a need for a big “pivot” to respond to the changing world. For some, this could be a pivot to new industries or markets. A straightforward move has been a shift to healthcare, as producing masks or PPE guarantees near-term revenue. Others have moved quickly to pursue second-order opportunities, such as the conglomerate which is starting a commercial real estate distressed fund. Other companies are evaluating where to place their future geographic bets. In the near-term, shifting focus from global customers back to the local market is a necessity – but CEOs know they will need to rebalance again as global economic power shifts during the recovery. Finally, the already in place requirement to shift to digital now is more urgent. For some, the digital shift is straightforward, such as restaurants adding home delivery; but for others the path is less clear and the technical investment much higher.

Pivots require the luxury of time and cash. Both are in short supply in an economy that, according to official Chinese government data, shrank 6.8 percent in the first quarter and has seen more than half a million businesses collapse. So preserving cash is top-of-mind. Most companies have decided to cut salaries rather than laying off employees (and layoffs are challenging under Chinese labor law). Aggressive leaders are culling the herd, with a CEO mentioning that, “We are using this chance to incentivize the lower quality employees to leave. “

The government is helping, but to date only with stimulus at levels far below that of the global financial crisis. Direct support to firms includes tax cuts, rent forgiveness on government-owned buildings, and pension contribution reductions. At the same time, reductions in banking reserve ratios will drive more lending. Most provincial and municipal governments are launching “consumer coupons,” such as in Jiangsu, which is distributing 50 and 100 RMB (around $7 and $15) coupons weekly for groceries and household goods. Xiamen is offering up to 500,000 RMB ($70,700) to individual travel agencies to discount tours for domestic travelers.

For most companies, this support is minimal compared to lost revenues or operating expenses. As one venture capitalist lamented, “Our start-ups received one month’s rent forgiveness, which covers the salary of a couple of engineers. It’s not a difference maker.”

Most private company leaders to whom we spoke realized there’s only so much the government can do. So, what do they want and expect? A clear, top-down message about the direction of economic policy. Once these themes are clear, the “bureaucracy can lay out the specific policies, the state-owned enterprises know where they need to prioritize, and the money starts flowing again.” In addition, there is universal understanding that supporting small and medium businesses is both critical, and hard. As one CEO mentioned, “these small companies have never been able to truly leverage the banking system.” An April survey of factory owners by the Ministry of Industry and Information Technology supports these findings, indicating “government clarity around which sectors will receive the most investment support” and “bringing aid to small and medium business” are the top two requests to the government.

As China reboots, businesses are struggling to get back to work, with the expected uneven response across companies and industries. Some are ahead of the curve, shifting money to new ventures, shutting unprofitable arms, and acting despite uncertainty. Other are fighting to survive. The majority sit between these two extremes, hunkering down to preserve cash, while waiting for direction on the economy and clarity on what to do next. As in most previous crises, the first group is likely to come out ahead in the long run.