April 06, 2020

The China Experience – Understanding the Evolution of the COVID-19 Crisis (Updated on 6 April, 2020)

Author:

Ian K. Lewis

The COVID-19 virus was first identified in China in December 2019, although the scale of the problem only became apparent during the Chinese New Year Holiday at the end of January. Since then the world has watched with increasing concern as the virus has spread. Most recently, the focus of the attention has moved away from China and there is mounting anxiety about the scale of infection in Europe, the United States and parts of the Middle East.

There has been, however, encouraging news from China as the number of new cases has slowed dramatically to the extent that the authorities have opened up large parts of Hubei province that have until now been subject to lockdown and are planning to largely open up the city of Wuhan on 8 April. International business leaders are recognising that China is at a different stage in the COVID-19 pandemic cycle compared to many other major economies. This has been recently illustrated by the following:

19 March was the first day since the outbreak of the crisis that China reported no new infections whatsoever, other than cases involving individuals arriving from cities outside of the PRC and although there have continued to be some cases of infections reported, numbers remain low.
Apple announced on 13 March that it was closing all of its stores worldwide temporarily except those in greater China – this was followed a few days later by the toy maker LEGO similarly announcing that they would close all its stores worldwide other than those in the PRC.
Disney has closed its theme parks in the United States and Europe but is partially reopening its park in Shanghai as a part of a “phased reopening.”

In early March, the WHO inspected progress in China including in Wuhan and Dr. Gauden Galea, its representative there, has stated that COVID-19 “is an epidemic that has been nipped as it was growing and stopped in its tracks. This is very clear from the data that we have as well as the observations that we can see in society in general (UN News quoted on Saturday 14 March)”.

Business people around the world are only too well aware that management of the COVID-19 virus is complex. Many moving parts need to be taken into account when planning for its likely impact and the opportunities there may be to mitigate the damage being done by its spread. Given recent developments in China, many in the business community (particularly those with interests in China) want to learn more about the China experience.

Clearly not all measures adopted by China will be appropriate for other countries and the circumstances and multiple factors will affect the preferred approach. The following outlines some of the measures taken in the PRC.

Emergency Response Law

China established an emergency incident early-warning system under the PRC Emergency Response Law, allowing local governments to issue emergency warnings including the issuance of specific targeted directions and orders.

All provincial governments issued Level-1 responses in late January (level one being the highest of four emergency levels available), which provided legal grounds for them to take urgent measures such as the closure of, or restrictions on the use of, places likely to be affected by the COVID-19 crisis (including the closure of restaurants or requirements that such businesses provide a delivery or takeaway service only); controlling or limiting activities likely to cause further spread of the virus (closure of gyms and cancellation of large meetings and conferences); ordering emergency rescue teams and personnel to be available and allocating resources and equipment.
Cities like Shanghai and Beijing have also issued guidance regarding resumption of business by offices and factories. For example, Beijing continues to require remote working, the regulation of the density of people in the workplace and restrictions on the use of lifts and elevators.

It should be noted that these requirements have been frequently reviewed, and strengthened when needed but also gradually eased where improvements in conditions have permitted. Beijing and Shanghai have both seen many shops, malls and restaurants reopen and in Shanghai and other cities, entertainment and leisure facilities have also re-opened, although all are subject to social distancing rules, such as restrictions on numbers of visitors permitted into museums.

Shutting Down Business and Industry

The Chinese authorities locked down Wuhan on 23 January and subsequently almost all other cities in Hubei Province. In the period following Chinese New Year, they:

Extended the Chinese New Year Holiday nationwide until 2 February, and in certain cities, including Shanghai, effectively until 9 February, to prevent the population travelling back to major cities on crowded busses, trains and planes. This was perhaps a step in the development of social distancing.
The Chinese authorities swiftly imposed requirements regarding return-to-work arrangements, encouraging people to work remotely and asking people to self-quarantine for 14 days (this was mandatory in Shanghai but, initially, only a recommendation in Beijing save in respect of anyone that had travelled to Hubei Province).
A range of public places including museums and various entertainment businesses such as cinemas, amusement attractions were closed in late January, at the beginning of the holiday, although some have since been allowed to reopen as conditions have improved.
People were required to wear masks in all public places including on underground trains, airports, shopping malls and office buildings.

Restrictions on Movement

Early on, restrictions on movement were introduced in Wuhan and much of Hubei Province, essentially requiring people to remain at home. This policy was extended to regions across China for periods of time, although many such restrictions, save for those in Wuhan, have been eased or lifted altogether.
There was also early action regarding transport links between cities (and in some cases, between towns and villages) aimed at ensuring that infected areas were isolated and limiting the spread of the virus.
Significantly, it should be noted that although Wuhan has suffered greatly, the total number of cases identified in Beijing and Shanghai (both cities with populations of over 20 million each) has only been 583 and 526 respectively, as of 3 April, with recent new infections having been almost eliminated save for a small number of individuals arriving from overseas (so-called imported infections).

Monitoring the Infected and Preventing Cross-infection

The Shanghai authorities introduced a system requiring all office building management to check the recent movement of staff members and to apply for approval for each individual wishing to enter.
The management of office buildings were also required to check the body temperature of staff daily and these procedures were quickly extended to hotels, large shops and other public places – significantly, these checks have involved reporting and disclosure (every person entering a building is required to provide his or her name and telephone number as part of the temperature-monitoring process).
Provincial governments including Beijing and Shanghai delegated much authority to local neighbourhood councils, who took measures to enforce such quarantine arrangements in apartment blocks.
Almost all cities have promoted the use of a “health code” (displayed on mobile telephones) generated through the use of big-data technology (thought to make use of information collected from railway and flight ticket systems, hospital systems, office and factory temperature-monitoring procedures, as well as other sources). Individuals are given a code, with those found to be ill or with exposure to regions known to be seriously affected by the virus receiving a red or yellow code (depending on local rules), while others not regarded as being high risk receive a green one. A green code is now being required by public transport systems, restaurants and supermarkets as an entry pass. China is now trying to build up a nationwide “health code” system so that you do not need to apply for a code for each city.
In Wuhan, almost every household was visited in order to identify and isolate infections and in Beijing and Shanghai office and factory management have worked closely with local authorities, reporting employees’ temperatures and the identity of those found to be sick.

Managing the Recovery

China has implemented a range of measures that have included the following:-

Quarantine – as the number of infections has declined, China has introduced increasing strict quarantine rules that have prevented individuals from overseas entering China and have made individuals subject to quarantine requirements, most recently 14 days’ compulsory quarantine at a government hotel/facility.
China has required increasingly strict rules with regard to health reporting and hygiene. All office building tenants in Beijing need to sign certain letters agreeing to comply with the directions of government and work closely with office management companies, and to require their staff to enter into letters of undertaking in favour of the government regarding compliance with the law and certain reporting requirements, as well as an agreement not to spread “false information” (reflecting a similar concern about what in some countries is referred to as fake news).
China implemented a range of measures which essentially constitute social distancing, e. g. limiting the number of people that may use restaurants and in particular regulating the distance between people and between tables. Similar measures apply to offices and other businesses in many cities.Beijing employers have been directed to allow only 50% of their workforces to attend their place of work, with all others required to work remotely.
Although China has started to ease restrictions on museums and public places, regulations have nevertheless been introduced to limit the number of people gaining admission and to require people to wear masks to reduce the risk of virus contamination. Reportedly, some indoor attractions have been ordered to close again after reopening.
China has delegated considerable responsibility for implementation to local neighbourhood councils to ensure that local enforcement and observation arrangements are made and that the councils work closely with management companies in respect of both office buildings and residential buildings to ensure that rules are strictly followed.

Moving Forward

In addition to the above, China has made a number of statements aimed at helping businesses survive during this challenging period and stabilising trade and foreign investment.

China is taking various supportive measures to soften the considerable impact of COVID-19 on businesses, including requesting state-owned landlords to reduce or exempt rent and encouraging private landlords to do the same.
Measures have been introduced exempting and reducing employers’ social insurance contributions, exempting VAT for severely impacted small-scale taxpayers, extending the maximum carry-over term for losses in 2020 and deferring tax and social insurance payment dates.
There have been recent statements from the State Council, MOFCOM (Ministry of Commerce) and NDRC (National Development and Reform Commission) regarding China’s intention to make foreign investment easier (it is expected that the financial and motor- vehicle sectors in particular will be benefit from these relaxations).
China has been reforming its foreign investment law for some time. Although the framework has been enacted, further detailed regulations as to how precisely the new regime will work are expected.
China has stressed its objective to eliminate differences between foreign-invested companies and domestic companies and ensure fairness and equal treatment within the China market.
As noted above, China has taken a flexible approach to the various restrictions that it has imposed on population centres. As it opens up Hubei, there has been a new focus regarding the need for caution about the risks associated with asymptomatic patients. It is making new efforts to research the risks further and senior officials have made statements cautioning people in Wuhan and elsewhere to continue to take precautions.

Issues to Watch

As result of recent developments, a number of important factors and potential complications for investors to watch going forward include:

Business faces short-term obstacles caused by on-going quarantine and travel disruption. Although problems at home seem to be under control, China has nevertheless imposed restrictions on travel into the country and these are likely to remain in place for some time. This will clearly impact on business and the ability for China to recover in the short term.
COVID-19-related problems being encountered regionally are likely to have some impact on food supplies and regional trade involving various raw materials which may also impact on China’s efforts to recover in the short term.
The PRC authorities clearly wish to take steps to achieve a strong recovery, particularly given that growth for 2020 is expected to slow to 4.1% ‒ many international observers believe that given the huge slowdown in international demand for its products, growth could be far lower than this. A series of reforms seems likely and international business will watch developments as new investment opportunities emerge. Some businesses will also hope that a swift end to the trade war could enhance these opportunities further and encourage global recovery.
On the other hand, the world is facing recession in 2020 and governments in other parts of the world will likely need to deal with political enquiries about the way in which the COVID-19 crisis was handled in terms of the timing of social distancing measures, testing and the availability of personal protective equipment for health care workers. Given that 2020 is an election year in the United States, it is entirely possible that these matters will be the subject of some discussion and allegations of under-reporting by the Chinese authorities may also feature in such exchanges. Business leaders need to consider (among other things) whether politics will make an end to the trade war less likely. Will politics in Europe, the UK and US result in policies that encourage investment in those markets with a view to being less dependent on Chinese goods and materials? Or will the need for all economies to recover result in a wish to encourage trade and increase consumption as quickly as possible? Given the size and importance of the Chinese economy, will all governments ultimately conclude that cooperation is the best way to achieve recovery?

International business will need to take these matters into account when formulating their strategies for the future.

The spread of COVID-19 throughout China has had a devastating effect on business. The virus has dealt the economy an enormous blow from which China must now emerge. Clearly, it is doing similar damage in other parts of the world. It is important that business people recognise that different markets are subject to change and risk mitigation plans, and that recovery strategies need to be prepared accordingly. Investors with business interests in China will wish to be fully familiar with any changes in approach the PRC authorities are adopting. Where appropriate, investors may wish to factor in this experience in reviewing their options and alternatives as the crisis develops in other markets.